Japan Falls Into Recession and the Worst Is Yet to Come

Japan Falls Into Recession and the Worst Is Yet to Come
May 19, 2020


The US dollar rallied against the yen yesterday despite the Federal Reserve’s warning that the economy could contract by up to 30% in the second quarter of this year. The greenback’s gain was aided by news reports indicating that the Japanese economy has entered into a recession, with a forecast of a likely deepening of the crisis. In the past 24 hours, the USD/JPY rallied from a low of 107.06 to a high of 107.45.

According to the Cabinet Office of Japan, the preliminary GDP Price Index rose 0.9% y-o-y in March, after the economy expanded by 1.2% in the earlier month. Economists had anticipated the GDP Price Index to increase by 0.7%.

However, the preliminary GDP data published by the Cabinet Office indicated that the economy contracted by 0.9% q-o-q in the first quarter, after shrinking by 1.8% in the earlier quarter. Analysts had anticipated the economy to contract by 1.1% in the first quarter.

Recession is a term used when an economy shrinks for two consecutive quarters. Economists surveyed by MNI have opined that the Japanese economy has entered into a recession as households restrict spending while enterprises trim their expenditure outlays, recruitment, and production to remain a “growing concern” amid the Covid-19 pandemic.

On an annualized basis, GDP (gross domestic product) contracted by 3.4% in the quarter ended March, from the earlier quarter. The economy also shrank in a sharp manner in 4Q 2019, mainly due to a hike in sales tax and a devastating typhoon.

Economists had anticipated a 4.5% contraction as social distancing initiatives crumbled consumer spending, while logistics breakdowns and fall in exports affected manufacturers.

The data affirmed that the third-largest economy entered into a recession prior to the announcement of a nationwide emergency by Prime Minister Shinzo Abe in April. The Prime Minister is expected to extend the emergency. In the second quarter, economists anticipate a 21.5% contraction. It would be the worst contraction ever recorded since the institution started publishing data in 1955.

Regarding second-quarter, Bloomberg’s economist Yuki Masujima stated as follows: “Beyond 1Q, high-frequency indicators suggest the pace of contraction deepened in 2Q, as the state of emergency declared in early April walloped activity. Spending might find some support, as households start to receive the 13 trillion yen in paychecks from the government this month.”

Economists pointed out that the country’s economy was negatively impacted by sluggish domestic demand, and they anticipate private consumption, which contributes to roughly 60% of the GDP, to have decreased 1.7% q-o-q, following the 2.8% fall in 4Q 2019. Consensus estimates ranged between -0.5% and -2.5%.

Capital investment during 1Q 2020 is anticipated to have decreased 1.4% q-o-q amid sluggish spending by manufacturers as overseas demand slumped. Economists had forecast capital investment to decrease by 0.5% and 3.3%.

According to the Ministry of Economy, Trade, and Industry (METI), tertiary industry activity contracted by 4.2% m-o-m in March, compared with a 0.7% decline in the earlier month. Economists had anticipated the tertiary industry activity to shrink by 3.6%.

In the US, Federal Reserve Chain Jerome Powell opined that the US economy could contract by a yearly 30% in the 2Q 2020, and the jobless rate could surge to 20%-25%. He does not foresee a long-term depression and expect the economy to expand in the second half of 2020, in case Covid-19 does not come back as a second wave. Nevertheless, according to the Fed Chairman, the recovery process could drag until the end of 2021.

Powell further stated that the Fed was “not out of ammunition by a long shot” and was ready to increase its lending schemes if required, even though negative interest rates are not a suitable policy. On April 29th, the Fed maintained its federal funds rate at 0% to 0.25%.

The news of economic contraction is anticipated to keep the yen range bound with bearish bias against the greenback.

The historical price chart indicates that the USD/JPY pair has successfully tested support at 106.40. The next resistance is anticipated only near 109.10. Additionally, the stochastic oscillator is in the bullish zone. Therefore, we are anticipating the currency pair to move up in the short-term.

JPY - technical analysis - 19th May 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Richard W

Richard W

Richard is the guy who know everything there is about the financial industry, working in a top firm for over 15 years, he will give the lowdown on some of the biggest companies in the world

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