In the wake of Japan’s recent Gross Domestic Product (GDP) data revealing a turnaround in economic growth, the Japanese Yen (JPY) gained strength, prompting a recovery in EUR/JPY from intraday losses. The currency pair aims to bounce back from weekly lows, currently trading around 160.60 in the early hours of Monday’s European trading session.
Japan’s GDP displayed a positive shift in the last quarter of 2023, expanding by 0.1% quarter-on-quarter, reversing the previous 0.1% decline. Although slightly below the expected 0.3% growth, this shift marks a crucial departure from a technical recession. The annualized GDP figure, at 0.4% growth, fell short of market expectations at 1.1% but still represented an improvement from the previous 0.4% decline. Consequently, Japan’s 2-year yield surged to 0.20%, reaching its highest level since 2011. Simultaneously, the 10-year government bond yield rose to nearly 0.75%.
These GDP figures have fueled speculations that the Bank of Japan (BoJ) may consider raising interest rates in the near future. Reports suggest that BoJ policymakers are leaning towards ending negative interest rates this month, fueled by expectations of substantial pay hikes in this year’s annual wage negotiations.
Last week, BoJ Governor Kazuo Ueda expressed confidence in seeking an exit from stimulus while pursuing the 2% inflation target. Furthermore, BoJ board member Junko Nakagawa emphasized the visible prospects for the economy to achieve a positive cycle of inflation and wages.
Conversely, the European Central Bank (ECB) maintained record-level borrowing costs as expected in the previous week. ECB President Christine Lagarde struck a cautious tone, underlining the necessity for additional evidence before contemplating rate cuts. The upcoming Eurogroup Meeting on Monday will be closely monitored for Lagarde’s remarks. Investors will also turn their attention to Germany’s Consumer Price Index (CPI) data on Tuesday for further insights into market dynamics.
