Stronger economic growth in Japan increases the odds of a hawkish BoJ 🏛️
The Japanese yen is starting the new trading week with significant gains. The reason behind the JPY euphoria today is the better-than-expected GDP data, which came in well above market expectations. Indicators of Japan’s economic strength signal upcoming changes in monetary policy, which is expected to be further tightened. At the same time, the U.S. dollar has shown remarkable weakness in recent days.
Yen reacts to GDP and easing trade war concerns
Japan’s GDP grew by 2.8% YoY in Q4 2024, exceeding the 1% forecast and up from 1.7% in Q3 2024. Seasonally adjusted annual growth stood at 1.2% YoY, beating expectations of 0.6%. Quarter-over-quarter growth reached 0.7%, up from 0.4% previously, and well above the 0.3% forecast. Strong GDP figures ahead of the spring wage negotiations could encourage the Bank of Japan to take a more hawkish stance.
- At the same time, investors are increasingly convinced that the threats of a trade war and high tariffs from the new U.S. administration are more of a negotiating tactic rather than a real policy shift as signaled by Republicans and Donald Trump before the U.S. elections.
- Last Friday’s higher-than-expected CPI and PPI data from the U.S. was balanced by the weakest retail sales report since 2020, which unexpectedly plunged by -0.9% MoM in January.
- The market has shifted expectations for the first Fed rate cut from December to September 2024, and the probability of a rate hike this year has become nearly improbable—a stark contrast to just two weeks ago when markets priced in over a 20% chance of a hike, at the peak of trade war fears.
Statements from Fed officials, including Michelle Bowman and Patrick Harker, indicate a cautious approach, with no expected rate cuts in the first two quarters of 2024. However, neither of them has ruled out a rate cut later in the year, instead emphasizing the potential for inflation to decline in the coming quarters, even amid persistently high wage growth and a slightly weaker labor market.
Japan’s Gross Domestic Product (GDP) has long been burdened by weak consumption and a shrinking labor force due to an aging population. However, today’s Q4 2024 data has raised hopes that stagnation may be ending.
- Annualized GDP unexpectedly surged to 2.8% (forecast: 1.1%, previous: 1.7%).
- Quarter-on-quarter GDP growth reached 0.7% (forecast: 0.3%, previous: 0.4%).
- The main driver of economic improvement was strong capital expenditures by businesses, which significantly increased investments.
- Private consumption also surprised to the upside, rising 0.1%, despite expectations of a 0.3% decline, signaling the first signs of consumer relief after a record inflation surge.
Source: XTB Research
Such a major surprise in GDP figures has led the market to price in earlier rate hikes in Japan, supporting the Japanese yen. Source: Bloomberg Financial LP
Interestingly, however, the options market did not anticipate a decline in USDJPY. A one-month risk reversal hedging strategy even indicated the possibility of a USDJPY rebound. Source: Bloomberg Financial LP
USDJPY Chart
The USDJPY pair is deepening its corrective decline, approaching a critical support zone, which aligns with:
- The local low from February 7
- The lower boundary of the 1:1 decline from November 2024
While the risk of a renewed inflation surge in the U.S. remains, the USDJPY pair is currently reflecting short-term dynamics, suggesting that a rate hike in Japan appears far more likely this year than in the U.S.. As a result, bond yield spreads between the two countries may begin to reverse their long-term trend. Today’s decline stalled at the 38.2% Fibonacci retracement level.
Source: xStation5
Source: xStation5
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