Is There Light Ahead For JPY & The BOJ?
Japanese 3Q GDP disappointed the market printing -1.2% on the annualized figure, versus expectations of -1% and -0.3% on the quarterly figure. However, the key driver of the weakness in activity over the period was the negative impact of extreme weather.
Strongest Storm On Earth in 2018
Typhoon Jebi wreaked havoc across Japan, first making landfall in Shikoku before moving to the Kansai region in the southeast. From here it moved towards Taiwan and far east Russia before moving away. Officials declared the storm, which was a Category 5 super typhoon, the most powerful storm to hit the world in 2018. It was also declared the most powerful storm to hit Japan since Typhoon Yancy in 1993.
The damage caused by the storm was immense with large scale erosion of infrastructure including roads, airports, bridges, and ports along with extensive damage to residential property across the country.
Business losses over the period were widespread with many forced to close as staffmembers were unable to safely man their stations, some suffering injuries.
The total cost to the economy has been estimated to be between 340 billion JPY and 620 billion, roughly 0.1% of GDP. However, estimates also claim that damage to uninsured agricultural land and property could be up to ten times as much as that figure alongside other uninsured losses of equally devastating magnitude.
The resultant contraction in GDP is therefore easily explained – private household spending dropped sharply and business investmentas well as exports were hit hard. Though this would usually be offset by a build-up in inventory, this failed to occur due to damage from the storm.
Hope For 4Q Recovery
However, looking ahead to the 4Q, there is hope for the Japanese economy to spring back to life. Typically, following natural disasters and extreme weather events, there is a pattern of initial contraction due to the damage from the episode followed by a recovery in activity fuelled by the cleanup and repair operations which take place.
Depending on the scale of the damage this surge in activity can have a considerable upward effect on GDP and given the scale of the damage from Typhoon Jebi, there is a strong likelihood that is what we will see in Japan over 4Q.
Inflation Could Rise
In the near term, inflation is also likely to rise, fuelled by a sharp decrease in the supply of agricultural products. However, this impact might be limited due to the heavy downward effect from the sell-off in oil prices seen over recent months which will likely buffer the upside pressure from higher food prices.
Light Ahead for The BOJ
A solid 4Q GDP print will be welcomed by the BOJ which has had a disappointing year. Following initial moves towards tapering and increasing yields, the BOJ was forced to retreat to the negative impact of investor uncertainty attached to trade war concerns.
Following this, the country was then devastated by Typhoon Jebi which inflicted both great personal and public loss. However, looking ahead to next year, if the truce between the US and China evolves into a proper trade deal and if there is recovery in activity following Typhoon Jebi, then we could start to see an environment in which the BOJ will once again make moves towards policy normalization.
However, we do still expect Kuroda to maintain a very cautious approach and to downplay such expectations regularly as we have seen over recent months.
For now USDJPY remains hemmed in against the 114.58 level resistance which has been the major upside barrier over the last two years. The loss of momentum in the market is visible, characterized by the contracting triangle pattern which has framed price action over recent months. For now, focus remains on an eventual upside break.