USD/JPY – Japan’s GDP improves but yen slips

• USD/JPY climbs above 137
• Japan’s GDP surprises to the upside
• JP Morgan expects Fed to trim rates

The Japanese yen is on a four-day losing streak and is in negative territory on Wednesday. In the North American session, the yen is trading at 137.39, up 0.74% on the day.

Japan’s GDP beats estimate

Japan’s GDP in the first quarter was higher than expected. The economy grew by 1.6% y/y, after a 0.1% decline in Q4 2022 and easily beat the estimate of 0.7%. On a quarterly basis, GDP expanded by 0.4%, up from 0.0% in Q4 and above the estimate of 0.1%.

One key driver behind the spurt in growth was personal consumption, as demand continues to rise now that the country has reopened. The services sector remains strong but manufacturing continues to struggle. On a sour note, exports fell 4.2% in Q4, as demand for semiconductors and automobiles declined.

The uptick in growth means that sustainable inflation could stay above 2%, and that could prod the Bank of Japan to take steps toward normalization, such as adjusting its yield curve control (YCC) policy. The BoJ has said it would consider tightening policy if inflation is sustainable above 2%, but any shifts in policy are likely to be small, especially if the yen remains weak. The BoJ announced it would conduct a policy review which could take a year or more, and I would not expect the BoJ to raise rates before 2024.

Federal Reserve members continued to remind listeners that more rate hikes are possible if inflation stays high. The Fed has also tried to dampen expectations of rate cuts in the second half of the year. The markets are listening somewhat, as the odds of a rate cut this year have fallen. JP Morgan came out in support of rate cuts on Tuesday, saying that “the market is right to be penciling in cuts”, as inflation remains too high and the US was likely headed for a recession.

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USD/JPY Technical

• USD/JPY is testing resistance at 137.08. Above, the next resistance line is 138.42
• There is support at 136.26 and 135.08

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