The Japanese Yen weakened after the country’s growth contracted by 0.5% in the first quarter. This data has decreased the likelihood of the Bank of Japan raising interest rates, as it maintained a wide interest rate differential with the US. The USD/JPY pair is trading higher following the weaker-than-expected Japanese GDP data.
The Japanese Gross Domestic Product (GDP) fell by a deeper-than-expected 0.5% in Q1, compared to experts’ forecasts of a 0.4% decline. This contraction, along with other negative economic indicators such as a fall in real wages and cooling inflation, is expected to delay the BoJ’s decision to raise interest rates. Some analysts predict a rate hike in November, while others suggest it may not happen until February 2025.
The delay in interest rate hikes is seen as negative for the JPY and positive for the USD/JPY pair, as it maintains the significant interest rate differential between the US and Japan. The Federal Reserve’s fed funds rate stands at 5.5%, while the BoJ’s policy rate is set at 0.1%, creating a 540 basis points gap that favors the US Dollar.
The recovery in USD/JPY also follows a sharp decline on the back of cooler-than-expected US inflation data. The data showed a lower-than-expected 0.3% increase in prices in April, raising expectations of a potential rate cut by the Federal Reserve in September. Additionally, US Retail Sales data showed zero growth in April, further weighing on the USD/JPY pair.
Overall, the weaker Japanese GDP data has contributed to the depreciation of the Yen and the strengthening of the US Dollar. The widening interest rate differential between the two countries is likely to continue driving the USD/JPY pair higher in the near term. The market will closely monitor economic indicators and central bank statements for further clues on future monetary policy decisions and their impact on the currency markets.
