Weakness in Q1
As we have seen across many developed economies this year, Q1 growth in Japan was disappointing, printing -0.6% year over year and -0.2% quarter on quarter. Marking a contraction for the first time on over two years, and ending the longest run of Japanese GDP growth in 28 years, this is clearly a major blow to the BOJ who have been making the first tentative movements with regard to signalling to markets that a change in policy might be on the horizon.
As the JPY crashes as Q1 GDP underwhelms expectation, it seems like it’s very bad data indeed. However, it is worth noting that Japanese GDP tends to be very volatile and looking back at an historic view of GDP data you can see many, sporadic, outsized spikes in both directions. With this in mind, it is not too surprising when the occasional bad quarter emerges, though traders will certainly be keen to see whether this marks a one-off weak patch, or the start of a weaker trend in Japanese economic activity which had previously been rebounding strongly.
Given the general theme of weak GDP seen across many in the G10 bloc, the market was braced for disappointment though the reading still fuelled a further sell off in JPY, which has been under pressure recently as reflected in the latest COT positioning data.
In terms of the data itself, net exports were the only real positive element, adding 0.1% while private consumption was neutral, residential investment contracted -2.7% and non-residential investment fell -0.1%.
Wages Turning Higher
Even as the JPY crashes as Q1 GDP underwhelms expectations, Japanese data has been much stronger recently, creating a far more positive sentiment among investors who, over the last two months, rapidly dismantled the record JPY short that built up last year. Indeed, forward looking indicators have been indicating a positive outlook. Among these, cash wages has been the strongest which, at 2.1%, are well above the levels we have been seeing for quite some time, which will firmly help private consumption recover over the year.
Implications of the BOJ
Regardless of whether it’s just a seasonal blip or a one off, the data still creates difficulty for the BOJ and the market will now have to wait until August to get the bank’s full view on the matter. High frequency data due ahead of that meeting will only be able to do so much to offset any residual fears in the market.
BOJ chief Kuroda has recently commented that the bank will be discussing the dismantling of its ultra-loose monetary policy heading into the end of fiscal year 2018. Though with this data in mind, it seems highly unlikely that the bank is likely to reduce its quantitative and qualitative easing programme this year. As with the ECB, the BOJ has a hard time managing market expectations, as shown by the rapid short covering over the last two months and Kuroda will be keen not to stoke any sudden shifts in market sentiment which can have an excessive impact on JPY, creating further difficulty for the bank.
The US Dollar has been on a solid rally against JPY over the last few months despite the massive shift in JPY positioning. Currently challenging the bearish trend line from last year’s highs, USDJPY looks to be on course to trade up into the completion of a large symmetry swing pattern with the rally seen over late last year at the 112.08 level if it can make it above current resistance. To the downside, key support comes in at the 107.98 level which was the site of the breakout at the start of April.