Yen rallies as Japan’s GDP outperforms

Asian Markets

The Japanese yen surged at the start of the trading week, fueled by stronger-than-expected GDP figures that have bolstered expectations of a policy shift from the Bank of Japan. Meanwhile, the U.S. dollar has struggled, weighed down by shifting interest rate expectations and mixed economic data.

Japan’s economy expanded by 2.8% YoY in Q4 2024, far exceeding the 1% forecast and improving from 1.7% in Q3. On a seasonally adjusted basis, annualized growth reached 1.2%, nearly doubling the anticipated 0.6%. Quarter-over-quarter, the economy grew by 0.7%, well above the 0.3% projection.

These robust figures come ahead of Japan’s spring wage negotiations, which could push the Bank of Japan toward a more hawkish stance. The market is increasingly pricing in the possibility of further monetary tightening as policymakers assess economic momentum and wage growth.

US Markets

Across the Pacific, the U.S. dollar has softened following last week’s economic releases. While CPI and PPI inflation readings exceeded expectations, the impact was offset by the sharpest decline in retail sales since 2020 (-0.9% MoM in January).

As a result, market sentiment has shifted, with traders now anticipating the first Fed rate cut in September 2024 instead of December. Just two weeks ago, markets had priced in over a 20% probability of a rate hike, but that expectation has now faded amid cooling economic momentum.

Statements from Federal Reserve officials, including Michelle Bowman and Patrick Harker, indicate a cautious policy stance, ruling out rate cuts in the first half of the year but leaving the door open for adjustments later in 2024, particularly if inflation continues to ease despite labor market softness.

Trade Tensions

Investors are also closely watching developments around U.S. trade policy, particularly concerns about tariffs under the new administration. Recent signals suggest that high tariffs and trade war rhetoric may be more of a negotiating tool rather than an immediate policy shift, adding another layer of complexity to the outlook for global markets.

With Japan’s economic momentum gaining traction and the Federal Reserve maintaining a wait-and-see approach, JPY strength and USD weakness remain key themes as traders navigate the shifting macroeconomic landscape.