How does the policy of the Federal Reserve Bank as well as the Central bank of its key market affect the company’s economic growth?
The Federal Reserve Bank policy is Monetary policy. Monetary policy in the United States comprises the Federal Reserve's actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates (BGFRS, 2022). To conduct monetary policy, the Federal Reserve utilizes the federal funds rate. The federal funds rate is the interest rate at which depository institutions trade federal funds overnight (FRED, 2022). Any changes that occur to the federal funds rate will significantly affect interest rates, which in turn influence the borrowing costs for businesses and households. In Japan, the Bank of Japan manages monetary policy and states it should "aim at achieving price stability, thereby contributing to the sound development of the national economy (BoJ, 2022)." While there are differences in each nation's monetary policy statement, they essentially have the same goal to stimulate the economy.
The U.S. Federal Reserve launched its first-ever comprehensive and public review of the monetary policy framework in 2019 and the strategy, tools, and communication practices employed to attain its congressionally mandated goals of maximizing employment and price stability. During this time, it was released by the Federal Reserve that its review, work, and inflation had gotten near the objectives. This indicated that it was an adequate time to pull back and consider whether the outline of U.S. monetary policy could be enhanced. (BGFRS, 2020).
At the end of Subaru's FY22, their revenue dropped by 3% to $20.5 million from $21.2 million. According to their most recent performance report, the revenue decrease was due to higher costs of raw materials, a decline in unit sales, and foreign exchange rates (Subaru, 2022). With the United States being Subaru's key market, they are expecting that due to rising interest rates, sales incentives per unit will increase by 200 dollars from 700 to 900 dollars bringing the total amount of sale incentives in the U.S. to $247.7 million (Subaru, 2022). High-interest rates to take out auto loans make paying off the debt more expensive. This is why high-interest rates decrease car sales, negatively impacting Subaru's sales and its ability to make a profit. That is how monetary policy affects Subaru's economic growth.
Effect of fiscal policies of the home country and two key markets on the company.
Fiscal Policy is the use of government spending and taxation to influence the economy. Governments usually implement fiscal policy to promote strong and sustainable growth and reduce poverty (Horton & El-Ganainy, 2020). In 2019, Japan’s prime minister raised taxes to 10 percent. The country was suffering from a secular dormancy which meant national private demand was too frail to endure full employment without the help of fiscal and monetary policy. Monetary policy was used as far as it could but was not enough. Fiscal policy was the best option for prop demand (Blanchard, 2019). The fiscal and economic costs of debt are low when interest rates are low. In Japan, fiscal cost interest rates are lower than the growth rate. When looking at fiscal prices, the traditional analysis of debt dynamics undertakes that the interest rate surpasses the growth rate. As for economic cost, the analysis focuses on crowding out capital as the leading economic cost of public debt. In such cases, Investors are prepared to hold public debt at low interest (Blanchard, 2019). Recently, Japan’s government approved an annual budget of $940 billion, which set a record as their most extensive spending plan to combat COVID-19 and restimulate their economy (Kajimoto, 2021). This is an example of how fiscal policies affect Subaru because Japan is putting money towards people where they can then put that money towards new vehicles affecting profit.
The United States is currently employing an expansionary fiscal policy since 2009 in response to the Great Recession (Up to Us, 2020). The fiscal policy widely credited by economists was caused by increased spending and tax cuts to boost economic growth during that time. This policy has continued to be set in place. However, the U.S. is currently experiencing decreased spending, causing inflation. According to the New York Times, on July 26, 2022, the United States entered a recession (Casselman, 2022). With the decrease in spending, people are not buying as many goods, including vehicles which affect Subaru’s profits negatively. Depending on how the U.S. handles the current recession, say through increasing discretionary spending, they are providing more jobs creating income for people where they will, in turn, spend money restimulation the economy. This again affects Subaru’s profits positively.
References
The Bank of Japan. Outline of Monetary Policy : Bank of Japan. (2022). Retrieved from https://www.boj.or.jp/en/mopo/outline/index.htm/#:~:text=The%20Bank%20of%20Japan%20Act,for%20the%20nation's%20economic%20activity.
Board of Governors of the Federal Reserve System. Federal Reserve Board - Monetary Policy. (2022). Retrieved from https://www.federalreserve.gov/monetarypolicy.htm
Business Performance. Subaru Corporation. (2022). Retrieved from https://www.subaru.co.jp/en/ir/individualinvestors/performance.html
Casselman, B. (2022, July 26). Is recession staring us down? Already upon us? Here's why it's hard to say. The New York Times. Retrieved from https://www.nytimes.com/2022/07/26/business/economy/recession-economy.html
Federal Funds Effective Rate. FRED. (2022, July 1). Retrieved from https://fred.stlouisfed.org/series/FEDFUNDS
Fiscal policy: An Introduction to the U.S Fiscal Policy. U.S Fiscal Policy: An Introduction To Our Fiscal Policy | 2020. (2020, November 6). Retrieved from https://www.itsuptous.org/US-fiscal-policy
Person, & Kajimoto, T. (2021, December 24). Japan's Record $940 Bln Budget to Help Recovery as Fiscal Reform in Back Seat. Reuters. Retrieved from https://www.reuters.com/world/asia-pacific/japans-record-940-bln-budget-may-help-covid-hit-economy-fiscal-discipline-doubt-2021-12-24/
Rethinking Fiscal Policy in Japan. PIIE. (2019, October 15). Retrieved from https://www.piie.com/commentary/op-eds/rethinking-fiscal-policy-japan
Review of Monetary Policy Strategy, Tools, and Communications. Board of Governors of the Federal Reserve System. (2022). Retrieved from https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-qas.htm
Hello,
Thank you for your contributions towards this week's blog. As you stated, "Effect of fiscal policies of the home country and two key markets on the company. Fiscal Policy is the use of government spending and taxation to influence the economy. Governments usually implement fiscal policy to promote strong and sustainable growth and reduce poverty”(Blog Post, 2022)
The Federal Reserve employs its policy instruments to manage the availability and cost of credit in the economy, and as a result, it exerts an influence on labor and inflation in order to carry out its mission of implementing monetary policy. The most important tool that the Federal Reserve uses to implement its monetary policy is the federal funds rate. Adjustments made to the federal funds rate have an effect on other interest rates, which in turn influence the cost for individuals and businesses to borrow money and the state of the economy. It does this by utilizing its authority to modify the amount of money in circulation in order to lower interest rates, bring inflation under control, boost employment, and direct economic activity (Shapiro & Wilson, 2021). The amount of money in circulation is kept under control by the Federal Reserve System through the use of open market operations, minimum capital requirements, and the discount rate. Individuals have a greater propensity to invest in goods and services when the expenses of borrowing money are made more affordable.
References
Shapiro, A. H., & Wilson, D. (2021, January). Taking the fed at its word: A new approach to estimating central bank objectives using text analysis. Federal Reserve Bank of San Francisco.
This was a great read. Very informative about the situation over in Japan. I don't believe that the lack of spending in our economy today is causing inflation unless you didn't mean to write it that way. I my opinion consumers are spending less and saving more in preparation of a recession in 2023. I also belive that the amount of jobs and hiring will decrease as well in the coming year.