As we move into the upcoming week, all eyes are on Japan’s Q2 GDP revisions. The initial annualised growth rate of 3.1% reported earlier is expected to receive a slight upward revision. However, with two-thirds of Q3 already behind us, any updates to Japan’s economic performance in Q2 data will likely go unnoticed unless they present significant surprises.
The week’s major economic focus includes Japan’s current account data for July and the capital movements that accompany it. Importantly, Japan’s recent economic growth has faced hurdles, particularly with net exports, which have negatively impacted the economy in three of the past four quarters.
Overview of Japan’s Economic Growth in Q2
External factors have driven mainly Japan’s economic performance in Q2 of this year, with trade and capital flows playing pivotal roles. Theoretically, the country’s trade balance should have improved with the yen’s depreciation, a condition that typically benefits exports. However, data from Q2 2023 and Q2 2024 indicate a different story.
Trade Deficits Continue to Plague Japan
In Q2 2023 and Q2 2024, Japan’s monthly trade deficit averaged more than JPY 405 billion. To put this into perspective, Japan’s average monthly trade deficit in Q2 2019 was just under JPY 40 billion.
This sharp rise in trade deficits reflects how external conditions, such as rising global energy prices and weakened demand from key trading partners, have constrained Japan’s economic momentum.
Capital Movements and Investment Patterns
One of the most interesting trends over the last few months has been Japan’s capital movements. Japanese investors, traditionally net buyers of foreign assets, shifted gears earlier this year.
According to the Ministry of Finance’s (MOF) weekly portfolio flow report, Japanese investors were net sellers of foreign bonds and stocks before August. This shift can be attributed to a stronger yen that made foreign investments less attractive.
However, prompted by yen strength, Japanese investors embarked on a massive buying spree in August. This increase in capital outflows is expected to significantly shape Japan’s financial landscape for the remainder of the year.
Yen Performance and Currency Trends
The dollar’s performance against the yen has been a significant focal point in recent months. Last month, the dollar reached a high point against the yen at JPY 141.70, but it has faced downward pressure since then.
US Dollar Vs Yen: US Yield Decline Fuels Yen Strength
The drop in the US 10-year Treasury yield to levels not seen since mid-last year contributed to the yen’s recent surge. Lower US yields typically reduce demand for the dollar, making the yen more attractive by comparison. Last week, the yen gained 2.7%, making it the best-performing currency among the G10 nations. The Swiss franc took second place with a 0.75% gain.
These trends suggest that the yen’s value is tied closely to US yields. As US Treasury yields continue to slide, the dollar’s value versus the yen is at risk. Technical analysts are closely watching the next key resistance level, which is estimated to be in the JPY 138.75–JPY 140 range.
The Impact of Yen Movements on Japanese Exports
The relationship between the yen and Japan’s export sector has been a critical part of the country’s economic strategy for decades. Japanese exports become cheaper and more competitive in global markets when the yen depreciates. However, despite the yen’s decline, Japan’s trade balance has struggled to recover.
Key Factors Impacting Japan’s Trade Balance
- Global Demand Slowdown: A major factor contributing to Japan’s persistent trade deficits is weakened demand from key export markets, including China and Europe. Both regions have faced economic challenges, leading to reduced demand for Japanese goods, particularly automobiles and electronics.
- Energy Prices: Japan relies heavily on energy imports, particularly crude oil and natural gas. The global rise in energy prices has pushed up the cost of imports, exacerbating Japan’s trade deficit even as exports benefit from the weaker yen.
- Supply Chain Disruptions: Ongoing supply chain disruptions, which began during the COVID-19 pandemic, affect Japan’s manufacturing sector. Delays in the supply of raw materials and key components have reduced the country’s ability to ramp up production in response to global demand.
Looking Ahead: What’s Next for Japan’s Economic Outlook?
As we move further into Q3, Japan’s economic prospects will depend heavily on a few critical factors.
- Yen Movements: Continued fluctuations in the yen’s value will directly impact trade and capital flows. Should the US yield curve continue to flatten, further downward pressure on the dollar could propel the yen even higher, which may paradoxically hurt Japanese exporters.
- Q2 GDP Revisions: Although Q2 GDP data is likely to make waves if revisions are noteworthy, the upcoming revision may provide insight into how the domestic economy performed under challenging external conditions.
- Capital Inflows and Outflows: Japanese investors’ appetite for foreign assets will also be something to watch. If the yen strengthens, we could see a continued outflow of capital, which may affect domestic financial markets and liquidity conditions.
- Energy and Commodity Prices: Global energy prices remain a significant determinant of Japan’s trade balance. Any further escalation in energy costs could worsen the deficit and reduce the economic benefit gained from a weaker yen.
While showing signs of resilience, Japan’s economy remains vulnerable to external forces. The country faces a delicate balancing act in managing growth amid global uncertainty, from trade deficits to currency fluctuations.
The upcoming GDP revisions may provide insight into how well Japan has weathered the storm in Q2, but the key storylines for the rest of the year will revolve around yen movements, trade balances, and capital flows.
The next few months will be crucial for investors and policymakers as they navigate global markets and domestic challenges. Whether the yen’s strength continues or trade deficits improve, one thing is certain: Japan’s economic trajectory remains intertwined with broader global forces.
At Vestrado, staying informed about global economic movements is essential to making smart, strategic decisions in your financial planning, investments, and business operations.
Japan’s economic trends, from its GDP fluctuations to its trade performance, offer a glimpse into broader market shifts that could impact industries across the globe. As Japan continues to navigate these challenges, opportunities arise for those who can interpret these signals effectively.
Whether you’re involved in international trade or financial markets or simply looking for insights that affect your business strategy, monitoring key economic indicators like currency movements and trade deficits can help guide your approach.
At Vestrado, we are committed to providing you with the latest, in-depth analysis to ensure you can respond proactively to market trends.
Leverage Vestrado’s resources to stay ahead of the curve and make informed decisions that can shape the future of your investments and business strategies. The next quarter holds both risks and opportunities—let’s navigate them together.
