USD/JPY in tight range as Japan Q2 GDP revised down to 28.1%

The Japanese yen (USD/JPY) is little changed as traders react to the mixed economic data from Japan. The pair is trading at 106.288, which is higher than last week’s low of 105.20.

Japan in its longest recession in decades

The Japanese economy contracted by 7.9% in the second quarter, producing a year-on-year decline of 28.1%. This decline was slightly better than the first and second estimates of a GDP decline of 8.1% and 28.6%, respectively. According to the Ministry of Finance, the improved data factored in new data about business investments.

This was the third consecutive quarter that the Japanese economy has contracted. In the fourth quarter of 2019, it contracted by 7.9%, partly because of a new consumer tax the company started. It contracted by 0.6% in the first quarter because of early impacts of the pandemic.

The data released today showed that private consumption declined by 7.9%. That decline was partially because of the state of emergency the country announced during the quarter. The important capital expenditure declined by 4.7% as firms focused on saving cash. Analysts polled by Reuters were expecting the expenditure to fall by 3.1%.

The sharp contraction of Japan’s economy has surprised many analysts because the country has handled the virus better. It did not announce widespread lockdowns and has recorded more than 72,000 cases. This is in contrast to the United States, which ordered lockdowns and still recorded more than 6 million cases.

Still, the contraction of Japan’s economy is better than America’s 31.5% decline in the quarter. It was nonetheless worse than the 3.2% increase in the Chinese economy and the 15% contraction of the European economy. In the latest BOJ interest rate decision, the bank estimated that the Japanese economy will contract by 4.7% this year.

Japan household spending falls

The USD/JPY pair is also reacting to weak household spending and wage data from Japan. According to the statistics office, household spending fell by 6.5% in July, leading to an annual decline of 7.6%. Analysts polled by Reuters were expecting the data to show a decline of 2.3% and 3.7%, respectively.

Another data showed that overtime pay in Japan dropped by 16.60% in July after falling by 24.7% in the previous month. That was the eleventh consecutive month that the overtime pay has fallen. This data is usually important because it shows how busy corporations are.

USD/JPY technical outlook

The daily chart shows that the USD/JPY pair has been in consolidation mode in the past few days. Subsequently, its volatility, as measured by the Average True Range indicator has been falling. The price is also between the 25-day and 50-day exponential moving averages and slightly below the 50% Fibonacci retracement level. Therefore, I suspect that the pair will continue rising as bulls attempt to test the next resistance at 107.00.