Japan’s GDP Contraction Highlights Yen Weakness and Economic Challenges

USD/JPY Performance: USD/JPY is currently trading at ¥154.60, down 1.30% from this week’s high. The pair experienced selling pressure following the release of softer US CPI data but managed to trim losses after weaker-than-expected Japanese GDP figures.

Japan Q1 GDP Contraction: Japan’s GDP contracted by 0.5% in Q1 2024, compared to a 0.1% expansion in Q4 2023, missing expectations of a 0.4% contraction. The annualized GDP contracted by 2.0%, against the expected 1.5% contraction and prior 0.4% expansion, leading to a weakening Japanese Yen. The slowdown was primarily driven by a decrease in consumer spending amid persistent inflation and sluggish wage growth.

Japan’s Economy: Sticky inflation, sluggish wages, and geopolitical risks are contributing to a cautious outlook for Japan’s economy. The weak yen benefits the export and tourism sectors but squeezes households and small businesses due to higher costs of imported goods.

Wage Growth Outlook: Despite the biggest wage hikes in three decades, real wages are not rising sharply as the yen weakens, squeezing consumer purchasing power. While wages are expected to increase in the second quarter, particularly after several labour unions secured substantial hikes, it remains uncertain how much this will boost consumption.

Impact on BOJ Rate Hike Plans: The weaker-than-expected GDP data creates doubts about the timing of the Bank of Japan’s next rate hike. Analysts suggest the BOJ may hesitate to continue tightening policy if GDP does not rebound in the current quarter. During its April meeting, the BOJ had warned that growth was expected to slow, and inflation was anticipated to increase in the coming quarters. The latest GDP figures complicate the Bank of Japan’s stance, as it must balance supporting the economy with defending a weak yen.

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