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Japan GDP growth, and Will USDJPY Fall Back Below 150?

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Yesterday, the USDJPY jumped above the 150 handle for the first time this year, setting off a flurry of activity in Japan overnight, coinciding with anticipation over Japan GDP growth. The level is seen as psychologically important as it could mean the pair is inclined towards escape velocity as the BOJ dithers on whether to hike or not. But, the catalyst for the move wasn’t from Japan.

The surprise move higher in US inflation in January which was reported yesterday was the main mover of the USDJPY. Monthly inflation was not only hotter than expected, but the largest growth came from the key services sector. The Fed has pointed to the necessity of getting that indicator down before it moves towards rate easing. As a result, the market moved from pricing in a rate cut in May, to now seeing it in June.

Talk, Don’t Take Action

In the immediate aftermath of the US inflation release, the USDJPY jumped above the 150 handle, and advanced a little bit more in the subsequent hours. Clearly there was a level of panic in Tokyo as a series of officials came out to warn that the FX rate was moving too fast, and actions could be taken. Prime Minister Fumio Kishida addressed the press twice in the course of the day to say he’s watching the Forex market with a “strong sense of urgency”.

The comments didn’t bring down the exchange rate by the end of the day, as there was no concrete action taken to address the move. Though how much the dollar will strengthen in the coming days will likely be the deciding factor, which will have more to do with market perceptions and Fed comments than Japanese government officials.

Putting Urgency into the Changes

If the sudden move allows the yen to stay above the 150 handle in the coming days, the BOJ could come under renewed pressure to address the weak yen. After all, it’s mostly the ultra-easing policy that is keeping the currency weak, as higher inflation in other major economies keeps their central banks from moving towards easing for now.

Enter Japan GDP data, to be published tomorrow. The main excuse for the BOJ to keep its policy in place is that inflation hasn’t been sustained and organic. To do that, there would have to be some reasonable amount of growth in the economy. reflecting Japan GDP growth. But last quarter, Japan saw its GDP shrink by 0.7%, with its annual growth rate threatening to also be negative.

What to Look Out For

If the Japanese economy were to stay weak, market movers might feel confident that the BOJ will keep rates lower for longer. That could keep the yen above the 150 handle. But a burst in Japanese activity might spook investors that the BOJ might actually go through with tightening in the near term.

The consensus is that Japan’s economy moved back into growth in the fourth quarter, with a quarterly rate of 0.4% compared to -0.7% prior. If the data doesn’t surprise substantially, the fate of the yen might then turn to whether the market fades the US CPI gains. In the past, “hawkish” data like that has led to an immediate market reaction that didn’t last more than a few days.

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