Reem Aboul Hosn Research and Market Analyst Officer, CFI Ltd
Reem Aboul Hosn Research and Market Analyst Officer, CFI Ltd

Japan’s downgrades Q2 GDP as trade war hits business investment. What is BOJ’s next step?

The Yen remains under pressure after the country’s GDP grew at a slower pace in the second quarter of 2019 by an annualized rate of 1.3% down from 1.8% growth y-o-y. Slower growth pace, weakness in the global economy and worsening trade protectionism, has intensified chances for Bank of Japan (BoJ) to deepen stimulus this month. 

An Economist in Japan mentioned that there’s a possibility growth will turn negative in the last quarter ending December of the year 2019. 

Additional indicators in GDP data report, showed an increase in capex or capital spending by just 0.2% from the previous quarter, much lower than a preliminary 1.5 % increase. The capex downgrade was based on a government survey emphasizing the demand-side of capex, which showed weakness in the sector. It can be attributed to the re-escalation in US-China trade frictions that forced manufacturers to cut spending in the third quarter, while investment by non-manufacturers maintained robust growth.

A private sector business survey published last week showed Japanese manufacturing activity declining for a fourth straight month in August while export orders remained in contraction for a ninth month in a row. Private consumption, which accounts for some 60% of gross domestic product, advanced 0.6% from the previous three months, in line with the preliminary reading.

Net exports - or exports minus imports - subtracted 0.3 percentage point from revised GDP growth, signaling that the economy is feeling the pain from the global growth slowdown.


Clouded outlook

The outlook for the world’s third-largest economy remains clouded as risks from declining manufacturing overseas and at home hit exports. Analysts have also warned of a possible drop in domestic consumption after Japan raises its sales tax to 10% next month, which could hit one of the economy’s few growth drivers.

Among the risks to growth, BOJ governor Haruhiko Kuroda kept the door open for cutting interest rates further into negative zone, if the negative growth deepens. Speculation is growing that the BOJ could ease policy as early as this month to prevent the yen from spiking; a possible outlook if the US Federal Reserve and the European Central Bank disclose new easing measures.

Technically, in September, the Japanese Yen slipped and risky currencies flourished on as investors turned more optimistic that the United States will find common ground with China on trade after agreeing to hold talks in October. 

On September 10, 2019 the Yen slides to five-week lows against the US dollars as a rebound in government bond yield promoted some investors to cut back on bearish bets on the global economy. Against the dollar, the yen fell to a five-week low of 107.50 yen, the weakest since early August.