Rounding out a pretty busy week for Japan, we have one of the most important events on the economic calendar this month: the first look at GDP for Q2.
Given all that’s been going on, this is likely to be extra important this time around. It could also have an outsized impact on commodity currencies like Australia and New Zealand.
Undoubtedly Japan has been negatively affected by the global economic situation. However, surveys have also shown domestic improvements. We should also note that the more recent trade tensions involving South Korea began after the close of Q2, so this factor will not have had an impact on the upcoming results.
What We Are Looking For
The median among surveyed economists is that the economy grew by 0.4% in the second quarter. This would be a slowing of pace from 0.6% in the first quarter. We should note, though, that at the time, the first three months were especially good, and that growth would slow as the year wore on. Generally, the forex market reacts more to the quarterly data than the annual data.
This would bring the annualized figure to just 1.7%, compared to 2.2% in the prior quarter. Japan’s economy generally struggles to push above 2.0%. And a drop below likely wouldn’t disappoint the markets all that much. Especially within the context of trade issues that are affecting the very large export sector.
Domestic Versus External
The two segments of the Japanese economy most impacted by trade concerns over the last several months have been automotive and high-tech manufacturing products. The more pessimistic of analysts point to the adjusted trade balance being negative during the entire quarter. They claim this will pull down on the GDP figure.
On the more optimistic side, we have domestic demand figures which have improved over the prior quarter. This was aided by a major holiday in May which encouraged significantly increased spending on vehicles and home appliances. Japan’s auto industry could use the help, after suffering the impact of slower sales to the country’s largest trade partner: China.
While domestic demand ticked up in May, after the splurge, there was a month of weakness. However, several analysts point to stable employment figures and a positive wage environment to help keep consumer demand healthy.
The Market Reaction
Lately, geopolitical risks have largely driven moves in the yen and a search for safe havens. In that scenario,the relative safety of Japanese assets might outweigh relatively small misses from expectations on the data.
A slowing of the pace of growth is already being priced into the market, so we’d probably need a significant miss in the data to really change the market’s outlook.
On the upside, better than expected data might not only give a bump to the yen but also exacerbate the safe-haven flows to one of the places that actually beat expectations. That move, though, would be tempered a bit. There is only a certain amount of demand for a safe haven, and if the yen gets too strong, the BOJ might take action.