Japan’s recovery likely went into reverse in Q1 as poor vaccine rollout clouds outlook – Forex News Preview
May 14, 2021 12:25 pm
Japan will publish its GDP estimate for the first quarter on Tuesday (Monday, 23:50 GMT) and the data is expected to confirm that the recovery went into reverse after a strong rebound in the second half of 2020. The government is battling to contain a fourth wave of the coronavirus just weeks before Tokyo is set to host the 2020 Olympic Games. However, the extended states of emergency risk pushing the economy into a double-dip recession, with the frustratingly slow vaccine rollout not helping matters. The yen has taken a modest knock from the unexpected setback to growth but BoJ policy is unlikely to be affected, hence, global yield differentials are once again in the driving seat.
Upside risk to Q1 GDP after consumption boost
It was only at the last meeting in April that the Bank of Japan revised up its growth forecasts, but those predictions are already looking dubious. The latest emergency measures announced in April look set to hurt consumption just as it was bouncing back from the previous states of emergency introduced in January. Household spending jumped by 7.2% month-on-month in March and exports surged as well. (The April figures for trade will be released on Thursday).
However, the combined strong rebound in both domestic and external demand in March was probably not enough to prevent an overall contraction in gross domestic product during the first quarter, though it does increase the odds of a positive surprise. GDP is expected to have declined by 1.2% quarter-on-quarter and by 4.6% on an annualized basis.
Risk of a double-dip
The economy is in danger of slipping into a double-dip recession as the fourth wave has yet to peak. Still, booming exports, strong government spending and the boost from the summer Olympics at the end of July might help stave off a contraction in the second quarter.
Nonetheless, whether Q1 GDP growth comes in a few percentage points above or below expectations or a technical recession can be avoided or not will not materially change the economic outlook in Japan. In the meantime, inflation remains benign; core CPI (due Friday) is expected to have slipped to -0.2% y/y in April. Thus, there is not a lot at this point that can throw Bank of Japan policy off the present path.
Yen pressured as BoJ to stay the course
The BoJ recently fine-tuned its easing measures of negative interest rates, quantitative easing and yield curve control. With little risk of inflation in Japan spiralling out of control despite the price surges in other parts of the world such as the United States, the BoJ has no reason to be worrying about running the economy hot, although it did scale back its ETF purchases in March. More importantly, the BoJ’s central policy of pinning the 10-year yield of Japanese government (JGB) bonds near zero is here to stay.
As bond yields globally have rallied this year, JGB yields have been stuck around zero, weighing on the yen. The widening yield differentials, especially with the US, have undoubtedly been a huge relief for policymakers as a weaker exchange rate not only makes exports more competitive but is also inflationary – something that would be welcomed in Japan.
The US dollar had rallied as high as 110.96 yen back in March but has since pulled back to around the 109-yen level. The pair has met stiff resistance in the 109.75 region, which it needs to overcome if it is to rechallenge the 111 level and resume the uptrend. However, price action is dangerously close to the 50-day moving average (MA) and slipping below it could pave the way for a test of the April trough of 107.46.
Fed policy and vaccines critical to yen’s path
Whether dollar/yen’s next direction of travel is above or below its 50-day MA will depend primarily on how the inflation picture evolves in America and how the Fed responds to that. The yen underwent a mini correction on the back of the worsening virus trend, falling steeply against its major peers after the government’s announcement of the latest states of emergency, so investors have already priced in the scenario of a slower recovery in Japan. However, unless the government is able to substantially accelerate its vaccine rollout, there is a risk the yen could face another similar repricing in the future if the economy falls further behind the recovery race.
Investors had initially not been concerned about Japan being late to join the global inoculation campaign as up until recently, the country was seen to be doing a good job in managing the virus. But markets are now watching Japan’s progress in earnest as further delays to its vaccination programme would risk virus restrictions staying in place far longer than in other countries.
Japan will publish its GDP estimate for the first quarter on Tuesday (Monday, 23:50 GMT) and the data is expected to confirm that the recovery went into reverse after a strong rebound in the second half of 2020. The government is battling to contain a fourth wave of the coronavirus just weeks before Tokyo is set to host the 2020 Olympic Games. However, the extended states of emergency risk pushing the economy into a double-dip recession, with the frustratingly slow vaccine rollout not helping matters. The yen has taken a modest knock from the unexpected setback to growth but BoJ policy is unlikely to be affected, hence, global yield differentials are once again in the driving seat.
Upside risk to Q1 GDP after consumption boost
It was only at the last meeting in April that the Bank of Japan revised up its growth forecasts, but those predictions are already looking dubious. The latest emergency measures announced in April look set to hurt consumption just as it was bouncing back from the previous states of emergency introduced in January. Household spending jumped by 7.2% month-on-month in March and exports surged as well. (The April figures for trade will be released on Thursday).
However, the combined strong rebound in both domestic and external demand in March was probably not enough to prevent an overall contraction in gross domestic product during the first quarter, though it does increase the odds of a positive surprise. GDP is expected to have declined by 1.2% quarter-on-quarter and by 4.6% on an annualized basis.
Risk of a double-dip
The economy is in danger of slipping into a double-dip recession as the fourth wave has yet to peak. Still, booming exports, strong government spending and the boost from the summer Olympics at the end of July might help stave off a contraction in the second quarter.
Nonetheless, whether Q1 GDP growth comes in a few percentage points above or below expectations or a technical recession can be avoided or not will not materially change the economic outlook in Japan. In the meantime, inflation remains benign; core CPI (due Friday) is expected to have slipped to -0.2% y/y in April. Thus, there is not a lot at this point that can throw Bank of Japan policy off the present path.
Yen pressured as BoJ to stay the course
The BoJ recently fine-tuned its easing measures of negative interest rates, quantitative easing and yield curve control. With little risk of inflation in Japan spiralling out of control despite the price surges in other parts of the world such as the United States, the BoJ has no reason to be worrying about running the economy hot, although it did scale back its ETF purchases in March. More importantly, the BoJ’s central policy of pinning the 10-year yield of Japanese government (JGB) bonds near zero is here to stay.
As bond yields globally have rallied this year, JGB yields have been stuck around zero, weighing on the yen. The widening yield differentials, especially with the US, have undoubtedly been a huge relief for policymakers as a weaker exchange rate not only makes exports more competitive but is also inflationary – something that would be welcomed in Japan.
The US dollar had rallied as high as 110.96 yen back in March but has since pulled back to around the 109-yen level. The pair has met stiff resistance in the 109.75 region, which it needs to overcome if it is to rechallenge the 111 level and resume the uptrend. However, price action is dangerously close to the 50-day moving average (MA) and slipping below it could pave the way for a test of the April trough of 107.46.
Fed policy and vaccines critical to yen’s path
Whether dollar/yen’s next direction of travel is above or below its 50-day MA will depend primarily on how the inflation picture evolves in America and how the Fed responds to that. The yen underwent a mini correction on the back of the worsening virus trend, falling steeply against its major peers after the government’s announcement of the latest states of emergency, so investors have already priced in the scenario of a slower recovery in Japan. However, unless the government is able to substantially accelerate its vaccine rollout, there is a risk the yen could face another similar repricing in the future if the economy falls further behind the recovery race.
Investors had initially not been concerned about Japan being late to join the global inoculation campaign as up until recently, the country was seen to be doing a good job in managing the virus. But markets are now watching Japan’s progress in earnest as further delays to its vaccination programme would risk virus restrictions staying in place far longer than in other countries.
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