Disappointing GDP Data May Lead To Monetary and Fiscal Stimulus
At the start of the week, second quarter GDP numbers out of Japan were released that came in weaker than expected. The Japanese economy grew just 0.3 percent in the second quarter while economists were pointing to double that number. The weakness was not only in terms of missed estimates but also in relative terms when we compare the number with the growth rate of 1.3 percent experienced in quarter one.
There are two main reasons for the failed growth. Firstly, government intervention in the aftermath of last year’s earthquake and tsunami disasters is now beginning to fade whilst the second aspect is the perpetual bane in the side of the BoJ & exporters – the yen which has been rising again since bottoming in March and is putting pressure on exporters.
Internal demand, which has been the main booster for the Japanese economy, is suffering from fading fiscal intervention. Last year, the Japanese government passed three extra aid packages totaling 18 trillion yen and implemented an extra one of 2.5 trillion so far this year. The extra help given by the government was significant and certainly helped avoid a contraction last year and also weighed positively on this year quarter one 1.3 percent growth. But, when comparing the aid injected last year with this year’s, it seems the government was beginning to turn off the tap. This has also spilled over the consumer sector with slowing consumer spending a direct consequence of this.
External demand is not helping the Japanese economy at this point too. At a time when the European economy is struggling and the US is not in the best of shape, Japanese exporters have an additional headwind of a stronger yen that makes their goods look relatively more expensive, certainly in contrast with Europe and their weak euro. Although the pair USD/JPY is down just 2% so far in 2012, it is down more than 6% from its peak observed in March.
Monetary easing led by the central bank with two intervention this year (February and April) has not been enough to weaken the yen. The main reason is the international turmoil we are currently experiencing. Investors have been desperately looking for safety and are blindly adding government debt from the safest countries to their portfolio even at negative nominal rates and are also similarly buying the safest currencies. Remember what happened to the Swiss Franc? Demand for the currency was so heavy that the Swiss national Bank had to peg its value to the Euro and virtually supply any amount of Swiss Francs that the market demands. With the USD/JPY currently sitting at 78.50 – near multi-month lows, there is a strong and growing reason for the Bank of Japan to intervene in the market. It can do this through extending its asset purchase program or, as many economists are now demanding, direct currency intervention flooding the currency market with Japanese yen while buying US dollars.
With the depressed quarter we have just seen, it looks also likely that the Japanese government will add to the efforts of the central bank by approving additional aid packages to boost consumer spending.
Weighing all these facts up, we think the odds on further intervention are now at the highest for some months. Shorting the yen has been a nil gain trade for a number of years now that it is an ‘under the radar’ one – precisely the point at which any move by the BoJ will have maximum impact, If a currency intervention does occur, the gains from holding short the yen may be substantial. We think that the currency most likely to benefit from such a move would be sterling and have opened a long GBP:JPY position at 1.23 to add to our Trading positions.
Filipe R Costa & Editor