Question

Discuss developments of business fixed investments after the Global Financial Crisis. Specifically, (1) compare with corporate profits, (2) point out reasons behind such developments, and (3) explain possible channels through which such developments affect Japanese economy.

Answer 1

The Global Financial Crisis was a result of over liberal lending with unforeseen bad debts arising for banks in the United States which resulted in a situation that all major countries across the globe were equally effected by the same.

In general, it led to a major dip in profits that people would make from stock markets since most people easily withdrew their money from the stock markets leading to an even grievous situation in which the value of shares went down because of which in the end many people had to lose their jobs.

Individual Fixed Investments refer to monthly payments that each individual would make, towards investing in the stock market. Usually a good return results in a situation in which people commit at investing some part of their total income towards investing in equity or otherwise in companies so as to gain value from the same.

The result of the Global Financial Crisis was increased interest rates and more scrutiny of business activities, before banks granted loans to them. This resulted in slowdown of most companies and reduced production and productivity levels since money was available lesser to run the enterprise.

As a result, corporate profits began rapidly declining since companies had to pay more to the banks in terms of interest. Further bad loans meant a large part of the money supply declined and people were left with little money to spend on them.

As a result overall demand declined and so did the overall economic activity in the United Sates and the world across.

Business fixed investment on the other hand refers to the investment which is done for over a period of 5 years. Generally speaking, these refer to heavy capital assets and land. As a result of the global crisis as evidently explained, the prices of real estate went down, however people still would not invest in them as loans were not readily available. Their might have been exceptions for companies riding high on cash, but overall business activity saw a rapid decline and this reflected in the investments made by business i.e. companies in fixed investments also.

Fixed investments are directly linked with interest rates, since these are paid off over a period of many years and as a result of the higher interest rates and lower economic activity these saw a rapid decline. Post government interventions though this has changed but the Global Financial Crisis largely effected business investment which is directly dependent on banks for its capital requisites.