USD Resilient Against the Yen Despite the Better than Expected GDP Report - BBH
Research Team at BBH, notes that the Japan reported stronger than expected Q1 GDP figures earlier today.
“The Bloomberg median was 0.1%, but instead, Japan reported a 0.4% expansion. This offset in full the revised -0.4% decline in Q4 15, (from -0.3%). Consumer and government spending drove growth while business spending fell 1.4%. Consumer spending rose 0.5%, more than twice the pace the market expected (0.2%).
While GDP was flat in the Q4 15-Q1 16 period, consumption fell. The rise in consumption in Q1 16 followed a revised 0.8% contraction in Q4 (from -0.9%). Consumption in Japan accounts for around 60% of GDP. It has fallen on average 0.2% per quarter for the past four quarters. It has risen 0.2% on average over the past 20 quarters (five years).
Business spending fell 1.4% in Q1, almost twice the pace expected, and the Q1 revision was not friendly (1.2% from 1.5%). During the past four quarters, business spending has fallen 0.3% on average. Over the past five years (20 quarters) it has averaged 0.5%. Our hypothesis is that the low level of business spending is not due to the lack of capital, high interest rates, or a heavy effective tax burden. If that is true, it means that lowering interest rates and cutting taxes are unlikely to business spending.
The policy outlook is unlikely to be changed by the GDP figures. The Abe government is still thought to be working on a fiscal package, which may include the postponement of the retail sales tax increase. While the details are expected to leak out, Abe expected to unveil it formally at the G7 summit at the end of the month that he hosts. Many continue to expect the BOJ to also expand its monetary stimulus. It may include buying more ETFs, and two new issues that meet its requirements are expected to come to market soon.
The US dollar has proven resilient against the yen despite the better than expected GDP report. It briefly dipped to almost JPY108.70 from above JPY109 but rebounded to begin the European trading at its session high near JPY109.55. The move above JPY109.50 resistance yesterday ran out of steam near JPY109.65. The market may be reluctant to take the dollar much through this area without fresh developments. The JPY110 area offers important psychological resistance, so that the dollar is unlikely to push through on the first approach.”