(09 AUGUST 2019) DAILY MARKET BRIEF 2：Japan economy surprises to the upside

Despite an upside surprise in Japan’s GDP growth, the yen was little changed. In the three months to June, GDP growth accelerated to 1.8%q/q annualised, beating estimates of 0.5%, while 1Q figure was revised to the upside from 2.2% to 2.8%. In the FX market, investors welcomed the news with little enthusiasm as USD/JPY didn’t budge and continued to trade between 105.80 and 106. This could be viewed as a good news as it would prove that despite the US-China trade war, and rising global uncertainties, the Japanese economy is somewhat resilient to external shocks.

Looking at the details, most of the upside came from an acceleration in domestic spending and higher than expected capital expenditure. However, government spending also gave a significant boost to the final figure. In addition, the central bank has re-opened the floodgate of free money as suggested by the expansion of the BoJ balance sheet over the last eight months. Finally, exports continue to be under pressure against the backdrop of a tense geopolitical situation.

The outlook remains cloudy as the upcoming increase in sales tax in October together with persistent uncertainties stemming from the US-China trade war. We anticipate the economy will remain in positive territory in the third quarter as consumers load up before the tax kicks in.