The Japanese economy has not gotten off to a particularly good start this year. According to GDP figures published this morning, economic output declined slightly in the first quarter, falling by 0.2% compared with the previous quarter. Unlike other countries, which saw an increase in exports in the first quarter as they rushed to deliver products to the US before US tariffs were announced, net exports negatively impacted GDP growth in Japan in the first quarter and were the main factor responsible for negative growth. Private consumption also stagnated in the first three months of this year, remaining virtually unchanged for the past two years, Commerzbank’s FX analyst Volkmar Baur notes.
JPY weakness to persist despite eventual BoJ move later this year
“Inflation remains above the central bank’s target, particularly when food prices are included in the calculation. However, weak private demand is likely to slow the rate of price increases in the coming months. In such an environment, it is questionable whether the ‘second force’ of domestic demand, much touted by the BoJ, will be able to generate enough inflationary pressure to raise the rate of price increases to 2% in the longer term.”
“Overall, with weak growth in the first quarter, ongoing high international uncertainty regarding trade with the US, and inflation driven more by special factors than structural developments, it is unlikely that the BoJ will raise interest rates again in the near future. We have long held the view that the Bank of Japan will be tempted to raise its key interest rate to at least 0.75%, with July being a good time to do so. However, given the ongoing tariff negotiations with the US and weaker-than-expected growth, the BoJ must realise that now is not the right time.”
“Nevertheless, this is unlikely to have much impact on the JPY. We have always believed that this latest interest rate hike will not significantly alter the markets’ view of the JPY, as it should be clear to everyone that this will be the final step. We now expect the Bank of Japan to raise its key interest rate once again towards the end of the year, when growth and international calm have improved. Nevertheless, this will likely be viewed as an isolated interest rate move rather than the beginning of a hiking cycle. Therefore, this adjustment to our interest rate forecast does not change our fundamental view on the JPY, and we still expect it to weaken slightly against the USD over the coming months.”