Earlier today, Japan released a very… well, confusing GDP report. It revealed that, while the economy grew 1.1% during the final quarter of 2009, the country’s expansion between August and October was revised to show no growth from 1.2%.
That wasn’t the first time it happened as Japan has been infamous for its GDP revisions. Taking a look back, most of the previous releases were revised by 0.1% or 0.2% but some were cut by as much a percentage point similar to what we saw today. It maybe that Japan’s measure is inaccurate. But how can that be given the country’s research and technological advancement? Something fishy is going on here…
Now, what was the reaction of traders to the seemingly sound fourth quarter GDP number? Well, there was none! Nada! Zilch! Zzzzz! Traders didn’t react to the news at all. The traders’ favorite USDJPY has barely moved from its weekly opening price. I thought GDP data was supposed to have a high impact on the markets?!
Well, part of the reason why the yen pairs barely moved was that the third quarter figure was revised down from an initial 1.3% growth to a flat line 0.0% number. This could have raised concerns whether Japan’s economy is actually doing better.
Still, my guess is that the reason for the rather quiet reaction is that traders are still running on risk sentiment, as it has been in 2010. We’ve seen the yen make some nice moves against the euro and pound the past few weeks as their outlooks are looking rather gloomy right now. As long as this continues, traders may be more inclined to steer away from risky assets, which would benefit safe havens like the USD and JPY.
In any case, the components of the preliminary report revealed it was the uptick in exports that helped the country post a 1.1% growth that beat forecast. Economists and analysts alike said that the effects of the global recovery have indeed spilled over to Japan, but added that they remain skeptical about the sustainability of growth.
As much as I’d want to think otherwise, I think they are right. For one, Japan’s government stimulus programs are starting to expire, which could put some downward pressure on economic activity. Secondly, consumer spending remains subdued, which isn’t helped at all by the falling employee wages. And who could forget about Japan’s deflation concerns? Month on month, the country’s CPI has traded the negative territory, implying that domestic demand has consistently been weak.
With all these uncertainties regarding Japan’s economic recovery, it’s not surprising that at the latest Bank of Japan meeting, the MPC decided to keep its status quo, leaving its overnight interest rate at 0.10%. BOJ Governor Masaaki Shirakawa said in an interview that the “upside and downside risks” of the economy are “broadly balanced.” With Japan still knee deep in deflation, the bank decided to keep its accommodative policies to overcome the slide in prices and to sustain the economy’s growth. It also maintained its growth and inflation forecast for the first half of 2010, saying that the pace of growth will most likely be steady.
On February 18, the central bank will again decide on its policies. And just as before, the bank is widely expected to keep everything as is. Japan’s fourth quarter uptick, which was boosted by strong export demand, suggests a promising outlook in its economy. The significant downward revision on its third quarter score, however, puts some serious doubt on the country’s recent performance. With or without the revision, the fact remains that the country is still in deflation. And as long as it is, the bank will most likely hold its policies easy.