USD/JPY whipsaws as Japan recession confirmed; depression possible

USD/JPY whipsaws as Japan recession confirmed; depression possible
  • The USD/JPY was little changed after the Cabinet Office released the Japan Q1 GDP data.
  • The numbers showed that Japan sunk into a recession before the state of emergency was announced.
  • Japan economy contracted by 3.4 per cent in Q1 and analysts expect the second quarter will be worse.

The USD/JPY pair was little changed today after the Japanese cabinet office released weak GDP data from Japan. The numbers showed that the country sunk deep into a recession in the first quarter.

USD/JPY little changed as Japan sinks into a recession

Japan GDP data disappoint

Japan’s economy contracted by 0.9 per cent in the first quarter, according to the Cabinet Office. This was better than the first reading data that showed a contraction of 1.9 per cent. The country’s economy shrunk by 3.4 per cent year on year, which was better than the previous 7.1 per cent.

These numbers mean that Japan is in a technical recession, which is defined as two consecutive quarters of shrinking. The country’s GDP contracted by 7.1 per cent year on year in the fourth quarter of last year. It dropped by 1.3 per cent quarter on quarter. This is the first recession since 2015

All sectors of the Japanese economy contributed to the weakness of the economy. Capital expenditure dropped by 0.5 per cent QoQ, which was better than the previous 4.6 per cent. Analysts were expecting the expenditure to drop by 1.5 per cent This number measures the amount of money companies have committed to buy, improve, or maintain their fixed assets. The Capex is a major mover of the USD/JPY pair.

External demand, which measures the demand from foreigners, declined by 0.2 per cent in the quarter. This is an important number for Japan because the country makes most of its money by exports. This number has been falling in the past months because of a confluence of the US-China and Japan-South Korea trade wars.

Meanwhile, private consumption declined by 0.7 per cent in the quarter. This data, which measures purchases by people has been falling because of the trade war, coronavirus, and a consumption tax that started in November last year.

Japan recession continues

The coronavirus pandemic has made things worse for the Japanese economy. The recently announced state of emergency has made it worse. Indeed, most well-known companies in the country have announced plans to reduce production.

Toyota, which sold more than 10.2 million cars in 2019 has said that it will reduce production by more than 20 per cent. Other companies that have cut production are Mazda, Isuzu, and Honda among others.

But the country’s weakness started last year when the country started a trade war with South Korea. As a result, the economy contracted by 1.3 per cent in the fourth quarter even after the government launched a $112 billion stimulus package. The contraction will continue in the second quarter since the country is implementing a state of emergency.

The Japanese government and the BOJ have responded to the coronavirus pandemic in several ways. The government has launched a $1 trillion stimulus program and is considering offering more support. The BOJ has retained negative interest rates and implemented an open-ended quantitative easing program. All these actions have supported the USD/JPY pair, which has declined by just 1.56 per cent YTD.

USD/JPY technical outlook

USD/JPY technical forecast

The USD/JPY pair was little changed after the GDP data was released. On the daily chart, the pair is trading at 107.00, which is slightly above the 50-day exponential moving average and slightly below the 100-day and 50-day exponential moving averages. Meanwhile, volatility, as measured by the Average True Range (ATR), dropped to the lowest level since February. Also, the USD/JPY pair has formed a bearish flag pattern, which is an indication that the downward trend will continue.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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