UK and Japan GDP in Focus

The Japanese economy is expected to recover from an unexpectedly poor third-quarter performance, while the UK economy is forecasted to avoid slipping into recession narrowly.

Revisions, Revisions, Revisions

Revision has been the theme for GDP reporting, as both the UK's and Japan's third-quarter GDP figures were revised lower, putting both island nations at theoretical risk of falling into technical recession by the end of last year. However, their economic situations may now differ. Notably, revisions to prior Eurozone GDP enabled the bloc to avoid recession twice in the past year.

With economic growth stagnating, unimportant technical revisions of a few decimal points in GDP can impact market reaction. However, investors appear to believe Japan's -0.7% quarterly contraction reflects temporary factors, with 0.4% growth expected in the final quarter of last year. A weaker yen initially aided export growth, but higher import prices due to currency depreciation dampened domestic demand as wages have not kept pace with inflation.

Is a Change of Policy Needed?

Slower growth is seen warranting the BOJ's persistently low interest rates despite inflation exceeding targets. However, the central bank appears committed to its timetable, maintaining policy irrespective of data fluctuations. Sources suggest rates may finally exit negative territory in April, with solid GDP potentially supporting that assessment.

Meanwhile, the UK economy is forecast to narrowly avoid recession by an estimated flat 0% growth in December, delivering 0% growth in the final quarter. A single decimal miss could significantly impact perceptions as the country would technically enter a recession. However, forthcoming revisions may reduce market impact versus current expectations that the BOE will cut rates in June.

USDJPY Hangs on GDP Release

The USDJPY currency pair currently benefited near the end of last year from broad weakness in the US dollar against expectations that the Federal Reserve would soon cut interest rates. However, the Fed's reduction in anticipated rate cuts has already driven USDJPY 5% higher already in 2022 alone.

A stronger US economy relative to weaker-than-forecast growth in Japan may cause further weakening of the yen, thereby validating the long-term 'cup and handle' pattern identified. With the 'handle' phase now completed at 140.92, breaking above the double top formation around 151.90 could generate additional upside momentum. Failure to break above may result in a consolidation towards 145.87 and 145 unless a full-blown reversal occurs beforehand

Source: SpreadEx / USDJPY

Key Takeaways

The Japanese economy is expected to rebound after unexpectedly contracting in the third quarter, while the UK economy is forecasted to avoid slipping into recession narrowly. However, only the UK is forecast to barely avoid recession with an estimated flat 0% growth in the final quarter. Slower Japanese growth warrants the BOJ's low interest rates despite high inflation. But the central bank seems committed to its timetable and will likely keep policy unchanged. Reduced rate cut forecasts have driven the USDJPY up 5% this year, with stronger US growth causing further weakness potentially, validating a long-term pattern indicating further upside.