USD/JPY Fundamental Daily Forecast – Japan’s Economy Shrinks 28% in 2Q; Worse than 1st Estimate

The Dollar/Yen is drifting slightly lower on Tuesday after reports showed Japan’s economy is sinking deeper into its worst postwar contraction and after the government announced it would spend billions from its emergency reserve for coronavirus vaccines. Earlier in the session, reports surfaced that Japan’s Suga was signaling a chance of calling a snap election.

At 05:42 GMT, the USD/JPY is trading 106.280, down 0.009 or -0.01%.

Japan’s Economy Sinks Deeper into Worst Postwar Contraction

Japan’s economy sank deeper into its worst postwar contraction in the second quarter as the coronavirus jolted businesses more than initially thought, underscoring the daunting task the new prime minister faces in averting a steeper recession.

Other data put the challenge in perspective, with household spending and wages falling in July as the broadening impact of the pandemic kept consumption frail even after lock-down measures were lifted in May.

The world’s third-largest economy shrank an annualized 28.1% in April-June, more than a preliminary reading of a 27.8% contraction, revised gross domestic product (GDP) data showed on Tuesday, suffering its worst postwar contraction, Reuters reported.

The record drop roughly matched a median market forecast of a 28.6% contraction in a Reuters poll.

The main culprit behind the revision was a 4.7% drop in capital expenditure, much bigger than a preliminary 1.5% fall, suggesting the COVID-19 pandemic was hitting broader sectors of the economy.

In a sign any recovery will be modest, however, separate data released on Tuesday showed household spending fell a bigger-than-expected 7.6% in July from a year earlier.

Real wages declined for the fifth straight month in July, pointing to possible deeper strains ahead for consumer spending.

Japan to Spend $6.3 Billion from Emergency Reserve for Coronavirus Vaccines

The Japanese government approved on Tuesday spending of 671.4 billion Yen ($6.32 billion) from emergency budget reserves to secure coronavirus vaccines, the Ministry of Finance said.

The government has said it hoped to secure enough vaccines for every citizen by the middle of next year, and provide them for free.

The news follows reports that Japan recently saw a renewed rise in infections but has been spared the kind of big casualties seen in western countries. Total infections stood at 72, 321 as of Monday, with 1,380 deaths versus a global tally of over 27 million cases and more than 888,000 deaths.

Short-Term Outlook

Traders showed little reaction to the fresh economic data because there were no surprises that could affect current fiscal or monetary stimulus levels. In other words, the news was already baked in, especially since all the other major economies showed similar numbers.

Nonetheless, the fresh batch of data will be among the factors the Bank of Japan will scrutinize at its rate review next week, when it is widely expected to keep monetary settings unchanged.

The central bank eased monetary policy twice this year including by setting up a lending facility to pump money to cash-strapped small firms, complementing two big government spending packages.

The BOJ is expected to hold off on ramping up stimulus for now as steps to spur demand could get people moving more freely into shops and risk spreading the virus.

For a look at all of today’s economic events, check out our economic calendar.

Published by

James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.