Contracting Japanese GDP Failed to Weigh on Yen
The outlook of the Japanese economy has certainly not improved in the light of recent data, in particular the country’s fourth quarter GDP report. Although the previous growth figure was revised upwards to 1.4% this failed to offset the decidedly severe contraction of -1.1% seen at the end of 2015. Many were prompted to label this dismal performance to be the failure of Japan’s ‘Abenomics’ program, provoking a fresh bout of market risk aversion.
In spite of this, however, the Japanese Yen made some sharp gains at the beginning of last week. This was partly due to the Yen’s safe-haven status and could also be attributed to speculation that the Bank of Japan (BoJ) may be inclined to loosen monetary policy further in response. Despite the central bank having surprised markets by going ‘sub-zero’ in January the Yen has remained on largely bullish form, a trend that is dragging on the relative strength of the domestic economy.
Confidence in Pound Sterling, meanwhile, remained limited as uncertainty over the UK’s future in the European Union continues to weigh on sentiment. Comments from Bank of England (BoE) Governor Mark Carney to a parliamentary committee prompted the Pound to slide as he highlighted the downside risks that a ‘Brexit’ poses to the domestic economy.
Yen Softened by ECB Monetary Loosening Measures
Stronger-than-expected Industrial and Manufacturing Production figures helped to bolster demand for Sterling on Wednesday, seeming to suggest that the UK was in a more robust state at the start of the year. While this was contrasted by the NIESR lowering its growth expectations for the three months to February, estimating that the domestic economy slowed to 0.3%, the GBP/JPY exchange rate continued to make gains.
The Yen did not benefit from the European Central Bank’s (ECB) decision to deploy more of its arsenal than markets had anticipated on Thursday, in a bid to combat persistently low inflation within the Eurozone. While investor reaction was initially uncertain, among concerns that central banks are nearing the end of their effectiveness in driving economic conditions, the sharp appreciation of the Euro produced fresh Yen softness.
Despite the UK’s visible trade deficit clocking in at a disappointing -10.2 billion Pounds on Friday the Pound managed to hold onto its gains. Although the wideness of the country’s trade deficit is likely to have negative ramifications for Wednesday’s Budget the increasing risk appetite of traders prevented the Yen from advancing against its rival.
Central Bank Meetings to Provoke Volatility
Further volatility should be expected for the GBP/JPY exchange rate in the coming week as the BoJ and BoE will both be delivering their latest assessments of monetary policy. Market expectations are widely for the central banks to hold steady on interest rates, with BoJ Governor Haruhiko Kuroda likely to want more time to gauge the impact of negative rates before committing to further cuts. Even so, with pressure on Kuroda increasing, markets remain wary of the chance for another surprise move.
The BoE, on the other hand, are almost certain to continue voting 9-0 in favour of leaving interest rates unchanged. Of more concern to markets will be the tone of policymakers, with any increased dovishness likely to lend credence to speculation that the bank’s first rate hike may not come this year. Should Chancellor of the Exchequer George Osborne also take a more pessimistic view in his budget speech the GBP/JPY currency pair can be expected to decline sharply.