USD/JPY hits key resistance as Japan braces for worst postwar slump

USD/JPY finally broke out last week to trade above $108.50 in a comfortable fashion. The buyers were able to capitalize on the break and force the price action to trade at $109.85, the highest since March. Separately, the Japanese economy is officially in recession. 

Fundamental analysis: The output has plummeted

The government of Japan said that the economy contracted 2.2% for the first quarter, which is a much better reading than a contraction of 3.4% indicated in the preliminary reading. Analysts expected the economy to shrink by 2.1%. 

“The upward revision to Q1 GDP displayed in the revised estimate is cold comfort given that output is plummeting this quarter,” said Tom Learmouth, economist at Capital Economics.

Thus, the numbers confirmed that Japan is officially in a recession, for the first time since 2015. Analysts are fearing that the worst is yet to come as the COVID-19 outbreak and lockdown measures took place in April and May.

“With the bulk of the impact from the coronavirus pandemic to be felt in Q2, the outlook for 2020 thus remains extremely challenging,” said senior economist at Oxford Economics, Stefan Angrick.

National parliament will start discussing today a second supplementary budget to inject fresh capitals into the struggling economy. The latest numbers from the Bank of Japan (BoJ) show that businesses are utilizing lending schemes, designed to help them stay afloat. 

“The BOJ has already done a lot to respond to the immediate crisis,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

Technical analysis: USD/JPY stops at the key resistance

Since mid-April, USD/JPY has been trying to break above the $108.50 resistance area. Once this milestone was reached last week, the buyers were able to quickly push the price action above $109.50 and arrive at the key short-term resistance. 

The pair is now testing a confluence of resistance on the weekly chart, ranging from $109.60 to $109.90 and consisting of the 100-WMA and 200-WMA. If this area can be cleared, the buyers will attempt to attack the multi-month descending trend line that currently trades at $110.60.

Summary

USD/JPY has run into critical resistance in the short-term after it managed to clear the $108.50 area. Another break would pave the way for a move to $109.60. Separately, Japan is now officially in a recession after its economy shrank for two consecutive quarters.