Two weeks ago, we got the preliminary reading of Japan’s Q4 GDP which widely disappointed economist expectations.
The market, however, barely budged. The precipitous drop in Japan’s economic growth was baked into the cake and was easy to explain: taxes.
Despite government protestations that the sales tax hike would have minimal effect on the economy, most analysts blamed Japan’s dismal performance on the October tax hike.
Early on Monday, we get the final reading. Expectations are for this to ratify the already reported -1.6% Q4 (lack of) growth. That means a total cumulative GDP of -0.4% for the year.
This result just manages to technically not fall into the definition of a recession. Q3 growth was just 0.1%, meaning that Japan was only 2 decimals away from falling into recession last year. And unless the economy stages a massive recovery in the next couple of weeks, it’s likely Japan is already in a technical recession.
It’s All About the BOJ
As macro figures have worsened over the last several months, analysts have been constantly asking when the BOJ will step in. Although to be fair, the BOJ has been one of the most accommodative in the world for the longest time.
In fact, many doubt that further rate cuts of increased asset purchases will do anything to help. Some even argue it will make things worse.
In any case, potential action from the central bank is likely to be the longer-term guide for the JPY. At first, there was the potential for coordinated action among central banks, but that didn’t materialize.
In the end, the Fed initiated an unscheduled cut on their own, putting pressure on other central banks. This has pushed speculation that the BOJ may cut the rate further into negative territory when they meet on March 17-18 next.
So, Why the JPY Strength?
As the outbreak of coronavirus has worsened and Japan’s economy has floundered, the JPY has grown weaker.
This opened the question as to whether the JPY was still seen as a safe haven currency, given the unique situation of Japan in the current economic climate. However, as risk appetite diminished significantly, the currency turned around, reasserting its role as a safe haven.
Some are pointing to Kuroda’s recent comments about how the bank might react to the economic fallout from COVID-19. He has insisted on further asset purchases and didn’t even mention rate cuts.
At the same time, he also showed that the bank was more flexible on inflation goals, prioritizing growing the economy over trying to spur inflation. On Feb 21, many traders saw alarming signs of a lack of liquidity among US equities and corporate debt, prompting a rush to safety, and supporting the yen.
Will it Continue?
Japan is most likely already in a technical recession, considering the economic impact that the measures to deal with the COVID-19 outbreak will have on this quarter’s growth.
Even before the virus, Japan’s economy registered negative growth. And with their largest trade partner unable to receive goods due to port closures, it’s hard for the export-oriented country to show growth.
However, now that China is showing signs of reactivation after the number of new coronavirus cases have been dropping steadily, trade and industry might be about to start reactivating in Asia. Too late perhaps for the first quarter… But, maybe by the second quarter, the demand for the safe-haven might finally slow down.