USD/JPY turns lower as Japan confirms first recession since 2015

The USD/JPY declined slightly after Japan’s Cabinet Office released the second preliminary reading of Q1 GDP. The pair is also reacting to the upbeat jobs report from the United States.

Japan economy in recession

The USD/JPY fell slightly after weak GDP data from Japan. According to the Cabinet Office, the economy contracted by 0.6% in the first quarter and by 2.2% year on year. Analysts polled by Reuters were expecting the economy to shrink by a quarterly rate of 0.5% and an annualised rate of 2.1%.

Still, these numbers were better than those reported in May. During that month, data from the Cabinet Office showed that the economy contracted by 0.9% and 3.4%.

The improvement of the data was mostly due to private consumption and capital expenditure. Private expenditure, which is an important part of the Japanese economy, declined by 0.8%. That was better than the previous estimate of -2.8%. Similarly, capital expenditure increased by 1.9%, which was better than the first reading of -0.5%.

Japan is mostly an export-oriented country. According to Statista, it is the fifth largest exporter in the world after China, the US, Germany, and Netherlands. Therefore, a slowdown in the overall global economy had an impact on the country’s performance in the first quarter.

The office said that external demand declined by -0.2%, which was worse than the first estimate of 0.5%. The net exports of goods and services declined by 0.2% in the quarter.

Optimism of a recovery

There is optimism in the market that the Japanese economy will rebound faster than most people expected. This recovery will be fuelled by positive private consumption, a robust international market, and the stimulus package by the Japanese government. But analysts don’t expect this recovery to last long. In a statement, Yoshimasa Maruyama of SBMC said:

“The Japanese economy will rebound very quickly, but after that, it will again falter and stall.”

The challenge for the Japanese economy is that global demand for most of the products it exports will continue being weak. For example, the international demand for cars will take time to recover because most people have postponed their auto purchases. At the same time, local consumption will be hampered because of a consumption tax that took effect in December last year.

USD/JPY technical outlook

The USD/JPY pair has been on an upward trend for the past six days. Today, this trend reversed following the mixed Japanese economic data. It is now trading at 109.51, which is slightly below the Friday’s high of 109.80.

On the daily chart, the price is slightly below the 78.6% Fibonacci retracement level and above the 100-day and 50-day exponential moving averages. The RSI has moved to the overbought level of 70.

Still, the price is in an upward trend, which will continue so long as it remains above the 61.8% Fibonacci retracement level at 108.05.