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- Japanese economy bounced back in the third quarter after contracting in the previous 3 consecutive quarters
- The economy expanded by 21.4% in Q3 after easing by 28.8% in the second quarter.
- The rising number of Covid cases in Europe and the US is a major risk for the pair.
The Japanese economy bounced back in the third-quarter boosted by increasing external demand and private consumption. That strength has pushed the USD/JPY to 104.51, the lowest level since September, 29.
Japan GDP recovered in Q3
The Japanese economy was in trouble even before the Covid-19 pandemic. In the fourth quarter of 2019, the economy contracted by more than 7.3% mostly due to an unpopular consumption tax increase.
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This year, it eased by an annualised rate of 2.2% in the first quarter and by 28.8% in Q2 as the economy battled the pandemic.
However, the situation changed in the third quarter, according to the latest numbers by the country’s Cabinet office. The data showed that the Japanese economy rose by 21.4% in the third quarter, a significant bounce from the 28.8% decline in Q2.
The median estimate by a panel surveyed by Reuters was for the economy to increase by 18.9%. The GDP rose by 5% on an annualised basis, better than the expected increase of 4.4%.
The performance of the Japanese economy was slightly weaker than the 30% increase of the US GDP. But it was better than the overall performance of the European and the Chinese economy in Q3.
Private consumption leads
The robust performance of Japan’s economy was mostly because of private consumption and external demand. Personal spending, which represents the biggest part of the economy, rose by 4.7% in Q3 after falling by 3.1% in Q2.
Exports, driven by the strong auto sector, rose by 2.9% in the third quarter after falling by 3.3% in Q2. Indeed, Japan’s automakers like Toyota and Nissan have sounded relatively optimistic about the sector recently.
Capital expenditure declined by 3.4% in the quarter as companies prioritised cost cutting and cash preservation. This decline was an improvement from the previous quarter’s decrease of 4.3%.
Meanwhile, the GDP price index, which measures the change in the price of all goods and services in the GDP, increased by 1.1%.
Still, the biggest concern for the Japanese economy is that its biggest trading partners are starting to ease. In the United States, there’s a chatter about another lockdown even as pharma companies make progress on vaccine. Similarly, in Europe, several countries like the UK, Germany, and France have all announced some lockdown measures.
So, what next for USD/JPY?
The USD/JPY has been fallen by ~1.10% since Wednesday when it tested the important resistance at 105.65. On the four-hour chart, the moving average convergence and divergence (MACD) has moved below the neutral level. Other oscillators like the RSI and stochastics are also falling, which, as you will see in our free forex courses, means that bears are in control. Therefore, I expect that the pair will continue falling, with the next support being at 104.33. This is the lowest level on October 21.
