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USD/JPY Fundamental Daily Forecast – Coronavirus Driving Japan’s Economy to Recession

Japan’s economy shrank 1.6% in the fourth quarter of 2019, according to a government estimate released on February 17. The decline from the third quarter is the biggest contraction since 2014.
James Hyerczyk

The Dollar/Yen blew past the 112 level on Thursday to a 10-month high against a broadly stronger U.S. Dollar. The catalysts behind the surge were increasing concerns over Japan’s economic health. Although demand for the dollar softened on Friday due to weaker-than-expected U.S. manufacturing and services PMI data, conditions are ripe for further upside action next week especially if the coronavirus continues to spread in Asia.

On Friday, the USD/JPY settled at 111.575, down 0.532 or -0.47%.

Concerns over the health of Japan’s economy began last Monday with the release of the Q4 2019 Preliminary GDP report and worsened with the release of reports on Core Machinery Orders and Flash Manufacturing PMI.

Japan’s Preliminary GDP Report

Japan’s economy shrank 1.6% in the fourth quarter of 2019, according to a government estimate released on February 17. The decline from the third quarter is the biggest contraction since 2014. The drop was even more severe – a 6.3% plunge – when measured as an annualized rate.

The slowdown wasn’t a surprise, however. Analysts had been expecting as much as the country absorbed a sales tax hike and grappled with the aftermath of Typhoon Hagibis, a powerful storm that hit the country last fall.

The surprise was that the data was worse than the 0.9% quarter-on-quarter drop that analysts polled by Reuters predicted.

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Revised Industrial Production

Revised Industrial Production rose 1.2%, but smaller than the 1.3% forecast and previous reading. Capacity Utilization came in at -0.4%. The prior reading was 0.3%.

The numbers are expected to weaken further in the near future as the coronavirus’ impact on industrial output remains a question.

Major automakers, for example, were forced to close plants in China to comply with a government lockdown and are only recently restarting some production.

Core Machinery Orders

Japan’s core machinery orders fell 12.5% in December from the previous month, dropping more than expected, government data showed on February 19. The month-on-month fall in core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, compared with the median estimate of a 9.0% decline in a Reuters poll of economists.

Flash Manufacturing PMI

The Jibun Bank Japan Manufacturing PMI dropped to 47.6 in February 2020 from 48.8 in the previous month and well below market expectations of 49.0, a preliminary estimate showed. The latest reading pointed to the steepest pace of contraction in the manufacturing sector since December 2012 amid the coronavirus outbreak, while activity was already under pressure following the sales tax hike and devastating typhoon in October.

Output, new orders, exports and backlogs of work all declined at steeper rates, while employment growth slowed. On the price front, output prices dropped after a rise in January, while input price inflation eased. Looking ahead, business sentiment weakened by remained positive.

Conclusion

Why did the Japanese Yen weaken last week? Japan’s economy is flirting with recession and the coronavirus could put it over the edge. Last week’s data serves as proof that the virus is likely to stamp out hopes for an economic recovery in the first quarter and investors lost confidence in the currency as a safe-haven asset.

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