**USD/JPY Holds Below 155 Despite Upbeat Japanese GDP: Market Awaits BOJ Policy Shift**
*Original article by VT Markets*
The Japanese yen remained restrained even after Japan’s Gross Domestic Product (GDP) figures exceeded expectations. The USD/JPY currency pair held below the 155 threshold, as market participants anticipate potential shifts in the monetary policy stance of the Bank of Japan (BOJ). Despite positive economic data from Japan, broader macroeconomic forces and central bank policy divergence continue to drive the pair’s movement.
Below is an in-depth analysis of the fundamental factors impacting USD/JPY, including recent economic data, monetary policy developments, and key market sentiments.
## Japan’s First Quarter GDP Beats Expectations
Japan’s economy displayed unexpected resilience in the first quarter of 2024. The nation’s preliminary GDP for Q1 surpassed market forecasts, highlighting a strong recovery driven by gains in private consumption and capital expenditure.
– **GDP Growth Rate**: Japan’s GDP rose by 0.5% quarter-over-quarter in Q1, equating to an annualized rate of 2.0%, outperforming projections of just 1.5%.
– **Private Consumption**: Consumer spending improved as supply chain issues eased and COVID-19 restrictions remained a thing of the past.
– **Capital Expenditures**: Business investments registered strong growth as corporations expressed renewed confidence in domestic demand and growth prospects.
– **Net Exports**: Contributed positively to GDP due to stronger demand for Japanese goods in the global market, though moderate yen weakness remains a source of concern for importers.
This economic outperformance reflects that Japan’s economy is now shaking off the lingering effects of the global pandemic. Several sectors, such as automotive exports, semiconductors, and tourism, have shown signs of significant rebound.
## Yen Struggles to Gain Ground Despite Economic Strength
Despite the strong Q1 growth data, the Japanese yen failed to mount a substantive rally. The USD/JPY stayed under the 155.00 level, indicating that the broader market is not yet convinced that Japan’s economic momentum will translate into tighter monetary policy from the Bank of Japan.
Key reasons for the yen’s underperformance include:
– **Divergence in Interest Rates**: The US Federal Reserve remains committed to a higher-for-longer interest rate stance to curb persistent inflation. In contrast, Japan has maintained ultra-loose monetary policy for years and has only recently made small movements toward normalization.
– **Yield Differentials**: Wide interest rate differentials continue to favor the US dollar. The 10-year US Treasury yield hovers above 4.4%, while Japan’s equivalent yield remains below 1%, incentivizing carry trades that pressure the yen.
– **Cautious BOJ Approach**: Although inflation in Japan has ticked upward, the BOJ has signaled a cautious approach. Traders are waiting for more concrete evidence of change in the BOJ’s stance before committing to heavy yen buying.
## Central Bank Outlooks: Federal Reserve vs. Bank of Japan
The divergence between the US Federal Reserve and the Bank of Japan remains the primary driver of the USD/JPY exchange rate.
### Federal Reserve
– **Hawkish Tone Maintained**: Despite recent signs of economic softening, key Fed officials have maintained a hawkish tone, stressing the importance of defeating inflation before lowering interest rates.
– **Delayed Rate Cuts**: Markets have pushed back expectations of rate cuts to later in 2024. The possibility of any reduction in rates before Q3 remains low, as monetary officials want clear confirmation that inflation is heading toward the 2% target.
– **Economic Conditions**: While job growth remains solid, inflation is proving sticky. Core Personal Consumption Expenditures (PCE), the Fed’s preferred inflation metric, remains above target.
### Bank of Japan
– **Ultra-loose Policy Persists**: The BOJ still maintains negative short-term interest rates and continues with large-scale asset
Explore this further here: USD/JPY trading.