Despite its super accommodative monetary policy, Japan will likely join the group of economies that contracted in the first quarter of the year when Q1 GDP growth figures are released at 00:50 GMT on Wednesday. A slowdown in April exports on Thursday (0050 GMT) and a huge spike in inflation on Friday (0030 GMT) could also point to a discouraging start to the second quarter, further damaging the outlook for the economy. That said, the battered Japanese yen has managed to gain ground thanks to its safe haven status, and the recovery may have just begun.
Japan will enter contraction in the first quarter
The Japanese yen claimed its first weekly gain after two months of continued hard selling that took it to its lowest level in two decades against the US dollar. The rally came after the U.S. economy unexpectedly signaled a contraction in the first quarter, raising fears that aggressive Fed policy tightening could hurt the economy more than it balances. inflation. As a result, investors sought safety in traditional bond markets, pushing US Treasury yields lower; the widening spread between rising US yields and muted Japanese equivalents weighed heavily on the yen and the latest break finally brought the yen back to life.
The question now is whether the yen will maintain its weekly edge as a deluge of data releases is expected to paint a picture of a sluggish economy that cannot effectively benefit from continued negative interest rates and massive bond purchases by the Bank of Japan. (BoJ). Analysts estimate an annualized contraction of 1.8% and a quarterly decline of 0.4% in the three months ending in March, compared to an expansion of 4.6% and 1.1% previously. Note that household spending fell by 2.3% in real terms in March compared to the previous year, while consumer confidence suffered a further deterioration in April. As a result, an economic slowdown now looks increasingly likely.
National CPI inflation could face a considerable increase
Other data will indicate that April was also not good for the economy. Exports would have increased at a slower pace of 13.8%y/y vs. 14.7% previously, while imports are expected to rise from 31.2%y/y to 35%.
Although Japan is famous for its deflationary mindset, rising input prices, corn energy and transportation costs, likely forced companies to pass the costs on to consumers in April, especially since a considerable depreciation of the Japanese yen, which is the longest in 50 years against the greenback, has exacerbated the impact of soaring commodity prices. The producer price index jumped 10% year-on-year in the same month, data showed Monday, while Friday’s national core CPI figure is expected to register a huge rebound to 2 .1% YoY vs. 0.8% previously for the first time in seven years.
Demand for safe havens could help the yen
However, it should be noted that the effect of currency depreciation varies from company to company. Companies that depend on imports and mainly serve local markets such as Sony face greater headwinds than companies in the automotive and software industry whose production lines are overseas and are less affected by the currency volatility.
Nonetheless, the BoJ Governor made it clear on Monday that the central bank is not targeting the currency markets, even if the currency’s recent movements were undesirable, and that it will patiently pursue monetary easing. If bond yields continue to falter this week, a worse-than-expected GDP report could reinforce the yen’s safe-haven status, pushing the dollar/yen towards the 127.50 – 126.93 support zone. A stronger pick-up in inflation could bolster bullish action later in the week, with investors likely eyeing the 125.00 level and the 50-day simple moving average next.
Alternatively, if easy monetary metrics discourage a contraction or allow for a milder economic decline, with inflation also coming in weaker than expected, the pair may push above key resistance at 129.20 with the possibility of testing the line. trend support broken around 130.80 and previous high at 131.24. Higher up, the spotlight will turn to the 132.30 – 133.40 area taken since early 2002.