The yen gained ground against the greenback yesterday after the Japanese Cabinet Office reported overwhelmingly positive GDP growth in the March quarter, surpassing analysts’ estimates. The heightened US-China trade tensions have increased the demand for safe-haven assets like the yen. From a high of 110.32, the USD/JPY pair recorded a low of 109.80 in the past 24 hours.
Japan’s Cabinet Office yesterday reported that the economy expanded by a seasonally adjusted 0.5% q-o-q in 1Q19. The preliminary report easily surpassed analysts’ expectations for a 0.1% contraction. In the previous quarter, the economy registered a downwardly revised 0.4% growth (initially reported as 0.5%).
On an annualized basis, the economy expanded by 2.1%, beating analysts’ forecast for a 0.2% contraction. In the previous quarter, the economy expanded by 1.6% (downwardly revised from 1.9%). Nominal GDP increased 0.8% q-o-q, compared with 0.5% in 4Q18. The reported figures surpassed analysts’ expectations for 0.1% growth.
Soon after the GDP data was published, Economic Revitalization Minister Toshimitsu Motegi told reporters that “there is no change in the idea of increasing the tax (consumption) in October to 10%, from 8%.”
Marcel Thieliant, a senior Japan economist for Capital Economics, opined that the robust GDP data indicates that Japanese Prime Minister Shinzō Abe will move forward with the tax hike plan.
Regarding the probability of a tax hike, Masamichi Adachi at JPMorgan Securities Japan agreed. “We now see a lower probability of the postponement of the scheduled hike in October to less than 30%, from 30-40% we had thought before the release of the GDP data.”
In the meanwhile, South China Morning Post has reported that Beijing is in “no rush” to resume trade discussions with the US. Analysts in China have said that the world’s second-largest economy is ready to terminate further talks if President Donald Trump continues to remain unrealistic in his demands.
Jia Qingguo, a professor at Peking University international relations, said: “The standoff should last for a while because the US has refused to make even the slightest compromise – to a point that it is somewhat unreasonable.”
The trade war intensified last week after China announced retaliatory tariffs on $60 billion worth of US products in response to Trump’s decision to hike tariffs on $200 billion worth of Chinese goods. The relationship was further strained when the US military revealed the sailing of one of its warships near the controversial South China Sea-based Scarborough Shoal controlled by China. The US terms the sailing as one among a series of “freedom of navigation operations” to irritate Beijing.
The addition of Huawei to the blacklist by Trump’s administration activated severe limitations on the US firms doing business with the Chinese company. Google, a subsidiary of Alphabet Inc, suspended business with Huawei. The suspension will deprive Huawei of gaining access to software, hardware, and other technical services, barring those available on an open-source licensing basis.
In its editorial column, China Daily criticized the latest US actions with a sharply worded message: “It seems as if the U.S. takes it for granted that it has the absolute say over everything in its dealings with the rest of the world, which has to take whatever the U.S. dishes out no matter how arbitrary and despotic that is.”
The strong GDP data and demand for safe-haven assets are expected to keep the yen bullish against the greenback in the short-term.
Technically, the USD/JPY pair is making a double top at 110.25. Furthermore, the momentum indicator is making a negative divergence with price. As a result, we can expect the currency pair to decline in the short-term.
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