On Monday, the yen dipped into losses against the dollar after a strong rally on Friday, reacting reversely to government preliminary GDP growth data. The figures showed that the Japanese economy grew more than expected for the sixth consecutive quarter, posting its fastest expansion in more than two years.According to the preliminary data released by the cabinet office, the Japanese economy expanded by 4% year-on-year in the second quarter, surprising analysts who expected a growth rate of 2.5%. This was well above the upwardly revised reading of 1.5% seen in the previous quarter and was the highest rate recorded since 2015. On a quarterly basis, GDP growth more than doubled the previous mark of 0.4% (upwardly revised from 0.3%), rising by 1% and exceeding the 0.6% forecasted.
The economy strengthened significantly as private consumption and capital expenditure experienced the highest improvement in more than three years, offsetting the contraction in external demand. With households spending more in durable goods and leisure despite subdued wage growth, private consumption expanded by 0.9%, surpassing the forecast of 0.5% and the previous mark of 0.4%.
Capital expenditure posted the highest growth since June 2015, growing twice the forecast of 1.2% at 2.4% q/q and jumping above the 0.9% (upwardly revised from 0.6%) observed in the first quarter. This expansion happened mainly due to higher business investments in software and construction equipment.
With the Japanese output recording its longest pace of growth since 2005-2006, analysts are more confident that improvements in consumption which account for the two-thirds of the economy will lift inflation toward the 2% Bank of Japan target. Note that the BOJ lowered the timing of inflation reaching the target six times so far due to weaker consumption. However, the Ministry of finance, Toshimitsu Motegi, commenting the data, said that more policies are needed to ensure a continuing recovery in domestic demand, pledging to apply further reforms to improve human capital and productivity. Moreover, he added that for the meantime there is no need to stimulate monetary policy further as consumption and business investments are following the appropriate direction.
Looking at the reaction in the forex markets, the upbeat Japanese data could not provide support to the yen. Dollar/yen climbed by 0.47% to 109.68 after touching a three-month low of 108.71 on Friday. Euro/yen surged by 0.28% to 129.43 following a downtrend which led the pair to a six-week low of 128.03.
