Japanese Yen Weakens As Economic Growth Slows

The Japanese yen has had a slow start to the week. The USD/JPY exchange rate is currently at 113.88, up 0.10 percent for the day. Japan’s GDP shrank in the third quarter, which was not surprising given that a state of emergency remained in place for Tokyo and the surrounding territories until the end of September. Consumer spending and business investment both showed signs of weakness.

In the third quarter, the Japanese economy performed poorly. GDP shrank by 3.0% year on year, far more than the average estimate of -0.7%. The lower GDP reading was mostly caused by health limitations imposed as a result of Covid. The economic downturn was compounded by supply-chain issues, which resulted in chip and other product shortages. The yen is unchanged on Monday, indicating that investors were unfazed by the bad news. The markets have seen health restrictions come and go, and are now focusing on the new fiscal package that the Kishida administration will reveal at the end of the week.

However, the economy’s prospects are improving in the coming quarters. We expect activity to go up in Q4 when restrictions are lifted, and the potential of extra fiscal stimulus being implemented before the end of the year should also help growth in 2022.

Nevertheless, higher growth expectations do not always imply a strengthening of the Japanese currency. We expect the Bank of Japan to retain its accommodative monetary policy for the foreseeable future, given the lack of inflation. In a world of rising global bond yields, this should translate into a weaker yen in the medium term, with a USD/JPY exchange rate of JPY120.00 by early 2023, according to our prediction.

Japanese Economy Underperforms

Haruhiko Kuroda, Governor of the Bank of Japan (BOJ), on Monday morning advocates for a weaker Japanese currency (JPY) while dismissing any negative consequences for the economy. Amid the remarks, the USD/JPY has struggled to find a clear trend, dropping to 113.75 during the session.

Japan’s third-quarter GDP data indicated again another difficult quarter for the country’s economy, as persistent COVID-related restrictions in Tokyo and its environs stifled consumer and investment expenditure. Quarter-over-quarter, overall GDP decreased 0.8 percent (not annualized), more than offsetting the unexpected 0.4 percent growth observed in Q2.

Private consumption decreased 1.1 percent, while company capital spending fell 3.8 percent, indicating that third-quarter GDP was lackluster across the board. While the report’s income data were not completely accurate, they were somewhat positive, with (nominal) employee remuneration up 0.5 percent quarter over quarter and 1.8 percent year over year.