USD/JPY: Yen Dips as Japan Slips into Recession

The Japanese yen is believed to weaken alongside the US dollar in the exchanges today as fresh data revealed that the world’s third largest economy had entered a technical recession in the September quarter. The report has stoked fears about the country’s recovery from the 2011 disaster and fueled speculation about fresh easing measures from the government and the Bank of Japan.

A report from the Cabinet Office yesterday confirmed that the Japanese economy contracted by 0.9 percent in the third quarter, equivalent to 3.5 percent on an annualized basis. Revisions to the figures also showed that the economy contracted by 0.03 percent in the June quarter, reversing preliminary figures which indicated a 0.1 percent growth in Q2. That means Japan is technically in recession, meeting two quarters of contraction in a row. The Japanese economy has been battered by financial turmoil in Europe, an export-debilitating strong Yen, and a territorial row with major trading partner China, dousing optimism that it has recovered fully from last year’s quake and tsunami.

A separate report also showed Japan’s current account surplus narrowed to 376.9 Billion Yen in October, or down about 30 percent on-year. A slowing global economy resulting to lower export demand and a spike in fuel imports due to the shutdown of most of the country’s nuclear reactors following the 2011 quake and tsunami have hit the nation’s current account surplus. Likewise, the territorial dispute with China has sparked a consumer boycott of Japanese products in China. Meanwhile, conditions at home are also looking bleak. The Cabinet Office also reported that consumer confidence worsened in November, suggesting that the deteriorating economy is debilitating sentiment. The overall sentiment index declined from 39.7 points in October to 39.4 points last month.

Last month, Tokyo approved $10.7 Billion in fresh spending to help boost the economy, more than double a package announced in October. For its part, the BOJ has unveiled policy easing measures in recent months as its counterparts in the US and Europe launched major moves to combat slowing growth. With the weak figures, speculation is now growing that the Bank of Japan will usher in further easing measures after its policy meeting this month, with the central bank’s close-watched Tankan corporate sentiment survey due this week seen to weaken. On views of additional monetary easing, the Yen is apt to decline, warranting a long position for the USD/JPY.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.