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Japan’s Q1 GDP Surprises with Strong Growth, Trade Outlook and USD/JPY Rebounds

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Japan’s Q1 GDP Figures Exceed Expectations, Indicating Economic Recovery

In a surprising turn of events, Japan’s first-quarter Gross Domestic Product (GDP) has shown a stronger growth trajectory than anticipated. The GDP expanded by 0.4% quarter-on-quarter (q/q) and 1.6% q/q Seasonally Adjusted Annual Rate (SAAR). Furthermore, the previously reported expansion of 0.1% q/q SAAR in the fourth quarter of 2022 was revised to a contraction of -0.1% q/q. These figures suggest that Japan experienced a brief technical recession from the third to fourth quarters of 2022 and has now emerged from it in the first quarter of this year.

Factors Driving Japan’s Strong Growth Momentum

The growth momentum in Japan’s economy during the first quarter exceeded expectations due to several key factors. Firstly, the impact of re-opening on private consumption was underestimated, resulting in higher-than-expected growth. Additionally, there was a surprise jump in business spending, which contributed to the robust economic performance. Moreover, the fall in commodity prices played a role in trimming Japan’s import bill, helping to alleviate economic pressures. However, the country’s growth was hindered by weaker external demand, as overseas markets continued to slow down. This delay in the export recovery acted as a drag on overall growth.

Trade Outlook: Anticipated Challenges and Expectations

Looking ahead, the global economy is expected to further slow down in the second half of the year, which will consequently weaken external demand. This projection raises concerns for Japan’s exports, which are likely to contract year-on-year (y/y) in the upcoming months of 2023, following April. However, it is worth noting that during the same period, import levels are also expected to decline, leading to a reduction in the trade deficit. It is predicted that Japan’s trade deficit for the year 2023 will be slightly below JPY 7 trillion, with the trade deficit amounting to JPY 5.6 trillion in April.

GDP Outlook for Japan: Challenges and Mitigating Factors

Despite the positive growth in the first quarter, weak manufacturing and exports are likely to weigh on Japan’s economic performance in 2023. However, the services sector is expected to provide some mitigation. It is essential to monitor the extent of the global slowdown in growth as it poses a downside risk to the services sector. Other factors that may impact Japan’s GDP growth include the weak manufacturing outlook for 2023, financial market uncertainty, and potential recession risks in the developed markets of the United States and Europe due to tighter monetary policies. However, the improving tourism sector may partially cushion these effects. Barring any external events such as an escalating war in Europe, worsening US-China relations, or the emergence of a deadlier variant of COVID-19, it is projected that Japan’s GDP growth will remain modest at 1.0% in 2023, matching the pace of 2022.

USD/JPY Pair Rebounds despite Weaker USD

In the foreign exchange market, the USD/JPY pair experienced a rebound, climbing around 80 pips from its daily low to reach a fresh daily high. Despite the overall weakness of the US Dollar (USD), several factors have influenced this upward movement.

Optimism surrounding a potential improvement in US-China relations has undermined the safe-haven status of the Japanese Yen (JPY), leading to increased demand for the USD/JPY pair. Additionally, the Bank of

Japan’s (BoJ) more dovish stance and commitment to continuing easing through yield curve control have played a role in supporting the pair’s momentum.

Conversely, the USD’s weakness can be attributed to unexpected breakdowns in the US debt ceiling negotiations and less hawkish remarks by Federal Reserve (Fed) Chair Jerome Powell. Powell stated that it remains uncertain whether interest rates will need to rise further, considering the impact of previous rate hikes and recent bank credit tightening. The possibility of a pause in the policy rate hike was also mentioned by Minneapolis Fed President Neel Kashkari.

Market participants are closely observing a key meeting between US President Joe Biden and House Republican Speaker Kevin McCarthy to discuss the debt ceiling, as this will impact the USD price dynamics. Moreover, US bond yields will provide further insight into the USD’s performance. Short-term trading opportunities will be influenced by broader risk sentiment, the BoJ Core CPI print, and the flash Japan Manufacturing Purchasing Managers’ Index (PMI) data, scheduled to be released during the Asian session on Tuesday.

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