Japanese GDP data points to short-term USDJPY buying

15 February 2024 69
Japanese GDP data points to short-term USDJPY buying

According to data released this morning, Japan's economy unexpectedly slipped into recession amid a downturn in the second quarter due to low domestic demand, prompting some experts and investors to dismiss bets on the imminent end of negative interest rate policy.

Gross domestic product contracted at an annualized rate of 0.4% in the final three months of last year, after a revised 3.3% decline in the previous quarter, the Cabinet Office said Thursday. The report showed that both households and businesses cut spending for the third consecutive quarter, and Japan's economy slipped to the world's fourth-largest in dollar terms.

Private consumption declined 0.2% as households struggling with rising living costs tightened their spending. Household spending fell 2.5% in December from a year earlier, declining for the 10th consecutive month. Business spending was also weak last quarter, falling 0.1%.

Overnight swaps following the release of the GDP report showed that markets are pricing in around 63% probability of the Bank of Japan hiking rates by April, down from 73% a day earlier.

The weaker-than-expected result will complicate the Bank of Japan's decision to implement Japan's first rate hike. It's a move that most economists surveyed last month predicted the bank would take by April.

The Bank of Japan's policy board has recently ramped up discussions about the exit from negative interest rate policy and attempted to assure markets that a rate hike would not signal a sharp shift in policy.

Governor Kazuo Ueda told parliament last week that financial conditions in Japan will remain favorable at present even after the abolition of negative interest rates.

What Bloomberg Economics says on the subject:

"The surprise contraction in fourth-quarter GDP takes Japan into a technical recession and casts serious doubt over whether the Bank of Japan will follow through on signals it sent in January pointing to a rapid departure from its current policy stance."

Thursday's data underscored the need to maintain soft policy, reflecting Japan's reliance on external demand as domestic demand declines amid persistent inflation.

Against the backdrop of unexpectedly high inflation in the U.S., USDJPY's prospects in the coming months look rather bullish, with the long-term assessment of USDJPY weakening on a 1-2 year horizon still valid.

The final recommendation is to buy USDJPY when the price touches the level of 149.00.

Profit should be taken at the level of 150.00. A stop-loss should be set at the level of 148.00.

This content is for informational purposes only and is not intended to be investing advice.

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