Yen retreats below 159.00 against the US Dollar as Japanese GDP disappoints
- USD/JPY ticks up from lows as Japanese GDP reactivates concerns about the economy.
- Japan's economic growth eased to 0.3% in Q2, against expectations of a steady 0.5% reading.
- The US Dollar is failing to capitalize on Yen's weakness, weighed by the Fed's dovish repricing.
The Japanese Yen holds marginal gains against the US Dollar (USD) on Wednesday, although the USD/JPY pair has returned to levels above 159.00 during the European session, after hitting daily lows around 158.85. Weaker-than-expected Japanese Gross Domestic Product (GDP) figures have cast doubts about the Bank of Japan’s tightening plans, adding pressure on the Yen.
Economic growth slowed down to a 0.3% pace in the second quarter in Japan, against expectations of a steady 0.5% reading, according to data released by the Japanese Cabinet Office earlier on Monday. Likewise, the yearly GDP growth decelerated to 1.1% year-over-year from 1.8% in the previous quarter, against expectations of an uptick to 2%.
Strategists at Brown Brothers Harriman note that "Japan real GDP growth underwhelmed in Q2 and details were poor," with "private consumption" essentially "flat, while private non-residential investment shaved -0.2ppt off growth." BBH argues that such "sluggish domestic demand activity will do little to ease Japan’s fiscal concerns, a major headwind for JPY," especially as "10-year JGB yields (2.91%) are catching up to Japan nominal GDP growth (3.2% y/y in Q2), putting the country’s debt dynamic on a more fragile footing."
Fed's dovish repricing is keeping USD bulls subdued
The US Dollar, on the other hand, remains depressed as investors reprice the Federal Reserve's (Fed) near-term tightening chances, following last week's figures. Data released last Friday showed that Retail Sales fell 0.6% in July, against market expectations of a 0.1% gain, following a 0.2% increase in June. Before that, producer and consumer price figures had shown easing inflationary pressures, and Nonfarm Payrolls revealed that net employment fell unexpectedly in July.
Against this background, traders have dialed back their bets for a September rate hike to 30%, from above 50% one week ago, according to data by the CME Group's FedWatch Tool, which has undermined speculative demand for the USD.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.