Japan Prelim Third Quarter GDP Rose 5% q-o-q in September

Japan Prelim Third Quarter GDP Rose 5% q-o-q in September
November 17, 2020


The Canadian dollar rallied against the yen despite the release of better-than-anticipated third-quarter GDP data by the Cabinet Office of Japan. As the uncertainty related to the US political situation is slowly fading, the market is shifting to riskier commodity currencies such as the Canadian dollar and the Australian dollar. Investors’ interest in the loonie is based on the assumption that the availability of the COVID-19 vaccine will ensure recovery of the global economy and boost consumption of crude oil, which is one of the major export revenue earners for the country. In the past 24 hours, the CAD/JPY pair rallied from a low of 79.65 to a high of 80.35.

According to the preliminary GDP data published by the Cabinet Office of Japan, the country’s economy grew 5% q-o-q in the September quarter, following a contraction of 7.9% in the earlier quarter, and higher than the 4.4% growth anticipated by economists.

In the March quarter, the economy contracted 0.6%. Likewise, Japan’s GDP contracted 1.8% in the December quarter of 2019. During the September quarter of 2019, the growth was flat, highlighting issues faced by the economy, even before the COVID-19 outbreak. Interestingly, Japan never implemented a complete lockdown, but tourism has mostly disappeared.

Furthermore, the Cabinet Office stated that the GDP price index increased 1.1% y-o-y in the third quarter, following an increase of 1.3% in the June quarter. The reported figure is a notch higher than the 1% increase anticipated by economists.

The September quarter GDP growth is the largest since the statistical organization began publishing data in 1980. Notably, it is the first economic growth recorded in four quarters. In the earlier quarter, the country’s GDP shrank by an annualized 28.8%, reflecting the worst performance since 1955 as the government announced a state of emergency in April to contain the spread of COVID-19.

On an annualized basis, the world’s third-largest economy rose by 21.4% in the September quarter, reflecting the largest growth in four decades. Despite the sharp rebound, the economic activity is still behind the pre-pandemic February levels.

In value terms, the annualized size of real GDP was ¥507.62 trillion (~$4.85 trillion), reflecting only 50% of the decline from ¥526.59 (~$5.03 trillion) in 1Q 2020 to ¥483.64 (~$4.62 trillion) in the second quarter. Private consumption and exports posted a sharp reversal, an increase of 4.7% and 7% on a q-o-q basis, respectively.

The data indicated an improvement in private consumption, the leading driver of economic growth, and exports, including vehicles and automobile spare parts. The reversal was anticipated, even though analysts caution that it won’t fall short of reaching the normal level.

The government said: “The Japanese economy for July-September 2020 is still in a severe situation due to the COVID-19, but it is showing movements of picking up later in the quarter.”

Commenting on the data, Junichi Makino, chief economist at SMBC Nikko Securities, stated that the GDP data indicate a 50% rebound that is anticipated continuing at a steady rate.

Pointing to the moderate consumption growth in the service sector, compared with goods consumption, Makino said, “The driver of growth will shift to the service sector. The momentum for growth on the macroeconomic level is therefore expected to slow down.”  

According to Japan’s Ministry of Economy, Trade and Industry (METI), revised industrial production increased 3.9% m-o-m in September, a notch below the initial estimate of 4% growth. Economists had anticipated no change in the initial estimate. On a y-o-y basis, the industrial production plunged 9% in September, unchanged from preliminary estimates and in line with economists’ estimates.

According to Statistics Canada, manufacturing sales rose by 1.5% m-o-m in September, following a contraction of 1.4% in the earlier month, but missed the 1.7% increase anticipated by economists.

In value terms, manufacturing sales were $53.80 billion in September. Out of 21 manufacturing industries, sales rose in 13, with the wood, chemical and food sectors driving the growth. Despite the increase, sales were 3.6% below the pre-pandemic February levels. On a q-o-q basis, manufacturing sales increased 26.6% in the September quarter, following four successive quarterly decreases.

With respect to the wood sector, sales increased 9.6% in September to a historically high level of $3.30 billion. In comparison to pre-pandemic February, September sales were 32.1% higher. Likewise, sales were 39.6% higher on a y-o-y basis. The chemical sector posted a 6.7% rise in sales to $4.50 billion in September, led by a solid increase in pharmaceutical and medicine sales. The food industry recorded sales growth of 1.3% to $9.20 billion in September, reflecting the second successive month of expansion. In nine of the Canadian provinces, manufacturing sales increased, with Alberta posting the most significant gain.

Total manufacturing inventories rose by 0.7% to $87 billion in September, reflecting the second successive monthly gain. Inventories increased in 14 out of 21 industries, driven by transportation machinery and wood product sectors. However, total inventory levels in September were 0.7% below the pre-pandemic February level. For the third quarter in a row, total inventories increased by 0.4%, following a 1.9% drop in the second quarter.

The inventory-to-sales ratio inched downwards to 1.62 in September, from 1.63 in August.

The capacity utilization rate for the total manufacturing sector rose to 78.5% in September, from 75.5% in August, led by an increase in production in 18 out of 21 industries.

The mixed economic data is expected to keep the CAD/JPY pair range-bound with a slight bullish bias.

The historical price chart indicates that the Canadian dollar is rising after testing the support at 79.90. The next resistance is anticipated only near 80.95. Additionally, the CAD/JPY pair is trading above its 50-day moving average, while the stochastic oscillator is in the bullish zone. Therefore, we are anticipating the currency pair to move up in the days ahead.

CAD - technical analysis - 17th November 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.



Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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