USD/JPY in tight range as Japan reports record economic contraction

The USD/JPY pair was little changed during the Asian session as investors reacted to the weak GDP data from Japan. The pair is trading at 106.54, which is slightly lower than last week’s high of 107.03.

Japan record GDP contraction

According to the Cabinet Office, the Japanese economy contracted by 7.8% in the second quarter after dropping by 0.6% in the previous quarter. This decline was worse than the decline of 7.6% that analysts were expecting.

Subsequently, the economy weakened by a record 27.8% on an annualised basis. Analysts polled by Reuters were expecting the economy to contract by 27.2%. This was the third consecutive quarterly decline of the Japanese economy.

Also, it was the worst decline since the Cabinet Office started collecting data in 1955. Most importantly, this decline erased all the growth recorded during Shinzo Abe’s premiership.

The decline was mostly because of a 8.2% decline in private consumption as more people stayed at home. Analysts polled by Reuters were expecting the economy to decline by 7.1%. This number is important because private consumption accounts for more than 50% of the economy.

External demand eased by 3.0% as the rest of the world declined during the quarter. Capital expenditure too declined by 1.5%.

Japan’s contraction was slightly better than that of the United States and the United Kingdom, which weakened by 9.5% and 20.4%, respectively. Still, it was weaker than that of its Asian peers like China and South Korea. China’s economy expanded by 3.2% while South Korea contracted by just 3.3%. In a statement to Nikkei, Yuichi Kodama, an analyst said:

“The top priority for the Abe government should be to bring the coronavirus outbreak under control so that normal economic activity can be resumed.”

The USD/JPY pair will next react to the Japanese capacity utilisation and industrial production data that will come out in the next hour. Recent data has showed that the country’s economy is improving. For example, the manufacturing PMI and retail sales were relatively strong in July.

USD/JPY technical outlook

The USD/JPY pair is trading at 106.55. On the daily chart, this price is slightly below the 50-day and 100-day exponential moving averages. Also, the price is slightly below the 50% Fibonacci retracement level. This retracement connects the highest and lowest points this year. Most importantly, the pair seems to have hit significant resistance at 107.00, where it struggled to move above last week. Therefore, the pair is likely to continue falling as bears target the next resistance level at 106.00.