Japanese Yen depreciates after decline in Q1 GDP

• The Japanese Yen weakens after growth contracts by 0.5% in Q1. 
• The data reduces further the chances of the BoJ moving to raise relatively low interest rates. 
• The data stops the Greenback’s decline against the Yen following cooler-than-expected US inflation data. 

The USD/JPY is trading in the 154.70s on Thursday, up a few tenths of a percent on the day after weaker-than-expected Japanese growth data weighed on the Japanese Yen (JPY). 

Japanese Gross Domestic Product (GDP) contracted by a deeper-than-forecast 0.5% in Q1 on a quarter-on-quarter basis, when experts had expected a 0.4% fall after a 0.0% change in the previous quarter, according to data from the Japanese Cabinet Office. 

The fall in economic growth when taken together with a fall in real wages in March, and cooling inflation in the capital Tokyo, is likely to delay the time when the Bank of Japan (BoJ) decides to raise interest rates. Whilst some commenters expect another rate hike in November others are saying it will now not be until February 2025 that the BoJ raises interest rates again. 

A delay in raising interest rates is negative for the JPY (positive for USD/JPY) as it maintains the wide interest rate differential between the US and Japan, which favors the US Dollar (USD) over the Yen. 

The Federal Reserve has set its fed funds rate at 5.5% whilst the BoJ has set its equivalent policy rate at 0.1%, indicating a roughly 540 bps wide gap between the two. This disproportionately aids the USD as investors are more likely to park their capital in Dollars where it can earn higher interest. 

The recovery in USD/JPY comes after its steep fall on Wednesday following the release of cooler-than-expected Consumer Price Index (CPI) data from the US. This data showed prices only rose 0.3% in April, which was below the 0.4% forecast and 0.4% previous.

In addition, on a yearly basis both headline and core CPI ticked lower. The data revived bets for the Federal Reserve (Fed) cutting interest rates in September, from about 65% prior to the data to 75% after, according to the CME FedWatch tool. 

US Retail Sales, out at the same time as the CPI data, further weighed on USD/JPY, after it showed zero growth in sales in April which was well below the 0.4% expected and the 0.6% downward revision in March, according to data from the US Census Bureau.