The yen showed almost no reaction to news that Japan's economic decline is strengthening Prime Minister Sanae Takaichi's resolve to develop an ambitious stimulus package, even though the central bank still intends to raise interest rates in the coming months.
According to the data, Japan's real gross domestic product in the third quarter of this year fell by 1.8% year-on-year. Compared to the second quarter, GDP declined by 0.4%. Private residential investment and exports were among the key factors weighing on overall output. Consumer spending, the largest component of GDP, remained virtually unchanged, failing to offset the weakening economy.
This downturn raises concerns about the sustainability of Japan's economic recovery. Weak consumer spending, traditionally the engine of the Japanese economy, points to lingering uncertainty among the population about the future. This may have been influenced by inflationary pressures and a general decline in purchasing power. The reduction in residential investment indicates weakening confidence in the real estate market, possibly due to an aging population and declining birth rates. Exports, another important driver of growth, also experienced a decline, which may be linked to the global economic slowdown and exchange rate fluctuations.
Attention now shifts to possible measures the government and the Bank of Japan may adopt to stimulate the economy. Options for fiscal stimulus aimed at supporting consumer demand and infrastructure investment are being considered. The Bank of Japan may also need to adjust its monetary policy to ensure more favorable conditions for borrowing and investment.
Overall, the latest GDP data underscores the need for coordinated efforts to strengthen the economy and restore confidence among consumers and businesses. The challenge is to find a balance between short-term stimulus measures and long-term reforms aimed at improving productivity and competitiveness in the Japanese economy.
The released data will likely bolster the Takaichi administration's conviction that aggressive government spending is necessary to support the economy. The prime minister is expected to present her first economic package as early as this week, and traders will closely monitor the actual spending figures, assessing the risk that increased issuance of government debt could threaten financial market stability.
It is also worth remembering that Japan's key inflation gauge has remained at or above the Bank of Japan's 2% target for three and a half years. Takaichi has repeatedly stated that fighting inflation is her top priority.
Economists expect the volume of economic measures to exceed last year's 13.9 trillion yen (USD 89.9 billion). This package will offer the first insight into how Takaichi intends to balance generous fiscal stimulus with budget discipline.
As for the current technical picture of USD/JPY, buyers need to break through the nearest resistance at 154.77. This would allow them to target 155.15, above which a breakout will be quite difficult. The furthest target would be the 155.65 level. In the event of a decline, bears will attempt to take control at 154.30. If they succeed, a break below this range would deal a serious blow to the bulls' positions and push USD/JPY toward 153.80, with the potential to reach 153.45.
