Japan Q1 GDP: More Upside for the USD/JPY?
It seems like the BOJ just can’t get a break. he yen continues to weaken as carry traders don’t believe the central bank has the determination to effectively knock it down, impacting the USD/JPY exchange rate. And then the data releases are aligning to support a narrative of a weaker yen.
Tomorrow’s release of Japanese Q1 data is likely to be pivotal for performance of the yen. And the consensus among analysts is that it will fit into the narrative of the BOJ having its hands tied and won’t be able to raise rates. This is a particularly acute problem as investors are coming around to see inflation in the island nation being driven primarily by the weaker yen.
Japan Wants a Softer Yen, But…
One of the main issues facing the BOJ is that Japan has benefitted from a weaker yen over the last couple of years. The exchange rate means that Japanese goods are relatively cheaper, which helps exporters. And Japan is an export-oriented economy, with major manufacturers like Sony, Toyota, Panasonic among others relying on their ability to serve customers overseas.
One of the main issues facing the BOJ is its desire for a weaker yen, influencing its policies and affecting the USD/JPY exchange rate.. And the economy would likely contract if the process were reversed with a stronger yen. Generally, when the economy improves, inflation goes up as faster circulation of money is a natural driver of prices. This is the “organic” inflation that the BOJ has been desperately looking for over the last several decades, and why the interest rate was so low.
Why the GDP Figures Matter so Much
With the currency so weak, there should be an uptick in GDP growth. And there was. But then it turned around and last year, with the third quarter reporting a -0.8% contraction. No matter, it coincided with a stronger yen. Q4 GDP came back to grow 0.1%, as the currency once again started to weaken.
But this time around, economists are forecasting that Q1 GDP for Japan will contract by -0.4%, wiping out the gains of the last quarter, and pushing GDP growth for the last twelve months firmly into negative. That is despite the yen weakening to multi-decade lows. In other words, the economic benefits of the weak yen might have vanished, while the drawbacks (high inflation, loss of consumer confidence) are getting worse.
No Way Out
The problem is that in order to shore up the yen, the BOJ would have to raise rates. But, it can’t do that, because tighter monetary policy would weigh on the economy. Although Japan isn’t technically in a recession just yet, there was no expectation that the BOJ would get around to raising until at least in the next quarter. And if Q2 is also negative, it would be virtually impossible for the BOJ to tighten in the middle of a recession.
All of that leaves carry traders increasingly confident that the yen will remain weak, and there is nothing the Japanese government can do about it on their own. Which will prompt more selling of the yen in a vicious weakening cycle. That is, unless there is a major upset with the data, such as a stronger than expected GDP which could give the BOJ a way out of its current trap.
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