We are finally about to get the data that JPY traders have been waiting nearly three months for: the GDP change rate.
As you might expect, this could produce some volatility in JPY pairs. Given that Japan is the source of carry trades into Australia and New Zealand, this event could see some volatility spill over into those currencies as well.
Here are some things to keep in mind ahead of this major event for the Asia session.
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Schedule and Expectations
We are expecting three data points to come in all that the same time on Thursday at 00:30 CET (or Wednesday at 18:30 EST). However, the main focus is going to be on the quarter on quarter figure.
The consensus among economists is for a quarterly increase of 0.3% in GDP, which would imply that Japan managed to squeeze out just 1.4% economic growth for the whole year.
This would be an improvement over the 0.6% quarterly drop registered in the Q3 final number. We should remember that there are two publications of the GDP figures, the preliminary and final. The former is the one that typically moves the markets and it’s the one we are discussing now.
What’s Behind the Analysis
Results from the third quarter were extraordinarily depressed due to trade problems and a series of natural disasters that affected Japan, reducing industrial production and consumer spending.
In the last three months of the year, however, that pent-up demand came to the market, driving up private consumption and capital investment, especially in December. In fact, the monthly tracking of GDP showed that it grew by 1.2% annualized in the last month of the year.
That’s on the positive side. But there are factors weighing on the outlook including continuing weak exports. The balance of trade during the fourth quarter was negative. Also, despite a better performance in December, longer-term capital investment is still seen as muted over ongoing trade concerns. It’s expected that the last quarter will mark the third consecutive drop in exports.
Where firms are investing is in labor-saving capital expenditures, as Japanese firms continue to experience labor shortages. The unemployment rate during this period fluctuated between 2.4% and 2.5%, underscoring Japan’s generational problem and shrinking population.
Even though the GDP might be going up on a per capita basis, with increased per-worker productivity, this is not translating into nationwide growth.
GDP growth in Japan has remained stubbornly below 2.5%, and in most cases below 2.0% for years. A 1.4% annualized growth would be in line with last year, and not a terrible disappointment for the market.
If the GDP figures beat expectations by several decimals, then we could see the JPY strengthening against its peers. A quarterly figure coming in negative would signal that Japan has slipped into a technical recession.
Going forward, expectations remain muted for GDP growth given the overall trajectory of the world economy and projected lower exports to China. This might be further priced into the yen, which took a bit of a tumble at the end of last year but has subsequently been recovering.
The final factor is the remaining sales tax hike which is on hold due to fears of the impact on the economy. Further disappointing GDP data might lead to that hike being put on hold once again, which would lower inflation expectations. That being said, CPI did come in at just 0.3% for December – something slightly surprising given increased private spending during the month.