The most recent data from the Cabinet Office shows that Japan’s economic output has already shrunk by more than 20 percent. This drop is blatantly obvious in the country’s Gross Domestic Product (GDP). That change came from the dire quarterly report shared last month. Meanwhile, Japan’s GDP contracted by 0.6% in Q3 of 2023. This figure was a downward revision from the advance estimate of 0.4%, reflecting a larger than expected decline. Given fears over the contraction deepening Japan’s economic malaise, those fears have resulted in a series of market shocks.
The performance of the JPY has been even more under the spotlight as financial markets have largely reacted to this weak GDP data. As such, a very strong GDP reading would normally support the Yen, and a very weak GDP reading could trigger risk-off sentiment. Negative recent figures have stunted the Yen, causing it to underperform against its peers. At the same time, the Australian Dollar (AUD) is charging higher as the Reserve Bank of Australia (RBA) looks set to make another big monetary policy pivot.
GDP Data Highlights
Japan’s GDP is an important indicator of overall economic health. It’s a standard indicator of the health of our economy, one that indicates the total value of everything produced in our country over a set time period. The quarterly release of this data provides a snapshot of economic activity, enabling investors and policymakers to gauge trends in growth or contraction.
The QoQ (quarter-over-quarter) reading in particular just measures how the current quarter’s economic output stacks up against the previous quarter’s output. The reported September contraction of -0.6% came in below consensus expectations. It marked a 0.3% drop from April’s -0.4% reading. Economists were expecting a bit of a better result too, with the consensus among economists forecasting a significantly smaller GDP contraction of just 0.5%.
The Japanese Cabinet Office has the important task of disseminating this data, which can be found on its official website here. The importance of these reports is not just in the raw numbers, but in their power to shape market expectations and inform monetary policy direction.
Market Reactions
The disappointing GDP numbers have already had short-term repercussions on currency markets, including for the JPY. As investors processed what a contracting economy would mean for central banks and markets alike, the Yen lost ground to nearly all major currencies. The trough also underscored Japan’s possible fragility, or weaknesses even in its strengths, calling into question the country’s longer term growth trajectory.
The AUD proved popular and strong during trade on Friday in the currency market, as traders started preparing for the RBA’s policy meeting on Tuesday. In Monday’s European trading session, the AUD/JPY currency cross jumped dramatically amid heavy trading volume. It came within a hair of a new 16-month high, getting up to about 103.20. This performance reflects a broader trend where the AUD has outperformed many other currencies amid favorable economic indicators from Australia.
China’s National Bureau of Statistics also reported a growing trade surplus that widened to $111.68 billion in October, from $90.07 billion. This unexpected good news lifted mood greatly when it came to sentiment around the Australian economy. Consequently, analysts continue to place a guarded sense of optimism towards the AUD’s future movements with regards to the external economic landscape.
Future Outlook
Market participants will be intently watching more economic data releases and central bank moves in Japan and Australia. The RBA’s next monetary policy decision will be a significant one. It would set precedent for investor expectations and influence currency valuation in the short run.
In Japan, economists will be assessing how the latest GDP figures might influence future policies from the Bank of Japan. With strong growth now being questioned, and with it a strong Yen, there are more calls for stimulus to spur economic activity and support the Yen.