Heads up, forex traders! This week’s set of events in Japan could make or break the yen’s longer-term trend. Better keep close tabs on these potential game-changers:
1. Japan’s Q3 GDP release
Talk about starting the trading week with a bang! The freshly released Q3 2014 GDP reading revealed that the Japan fell into a technical recession, as the economy contracted by 0.4% during the period. Analysts expected to see a 0.5% GDP rebound for the quarter, following the previous period’s 1.8% contraction.
Components of the report indicated that private consumption posted a mere 0.4% uptick for the quarter, lower than the projected 0.8% increase. This goes to show that this year’s sales tax hike from 5% to 8% is still weighing on spending, months after its implementation in April.
2. Potential snap election
The latest round of reports from Japan suggest that Prime Minister Shinzo Abe’s policies might be doing the economy more harm than good. This was probably why Japanese officials hinted last week that Abe might dissolve parliament and call for a snap election this year.
Word through the forex grapevine is that the snap election could be held in December 14, with campaigns set to start in December 2. This legislative shake-up could pave the way for revised economic and fiscal plans, as the current ‘Abenomics’ is losing support. Prime Minister Abe is expected to make his announcement regarding the snap election schedule in tomorrow’s Asian trading session.
3. Sales tax hike delay
Another groundbreaking announcement was the potential delay for the next sales tax hike, which was originally scheduled for October 2015. With recent data from Japan indicating that the economy is too fragile to withstand another blow to spending, Abe might push the tax hike further back to April 2017.
Abe mentioned that he would wait for the Q3 GDP figures to decide on the timing of the next hike, which would raise the consumption tax from the current 8% to 10%. Postponing this move might make it more difficult for Japan to reach its fiscal targets though, as government debt has swelled twice as much as the country’s GDP.
What could these mean for the yen’s forex price action moving forward? On one hand, the fact that Japan has fallen into recession could prompt another round of BOJ stimulus, which might mean another round of yen weakness. On the other hand, the weak growth figure suggests that the next tax hike is likely to be delayed and that the economy might have more room to recover, which then lowers the odds of BOJ easing.
It’s worth nothing that the yen’s initial reaction to the weak GDP report was a bullish one, as forex market participants probably speculated that the government might go easy on its fiscal policies and put more focus on reviving economic growth. Do you think the yen is bound to erase its recent losses or was the GDP reaction just a retracement?