Japan: All eyes on first estimate of Q1 GDP – BBH

Research Team at BBH, suggests that Japan reports several pieces of March data, including industrial output, but the most important data point in the week ahead is the first estimate of Q1 GDP.

Key Quotes

“The median forecast from the Bloomberg survey is for a 0.1% increase on the quarter, which would extend the saw tooth pattern seen last year with alternating quarters of positive and negative growth. In 2014, there were also two-quarters of contracting growth.

Given the narrow margin, the process of rounding could easily produce another growth-less quarter. At the end of the day, though, a 0.1% expansion or a 0.1% contraction is essentially the same thing. Investors ought not to be fooled by the implied precision of measuring growth by tenths of a percentage point. The fact of the matter is that the BOJ estimates trend growth in Japan to be a lowly 0.2%, which is one tenth of US trend growth.

Small variance around zero is seems to have little policy significance at this stage. The Abe government already appears to be moving toward fiscal support, including, as has long been rumored, the postponement of the retail sales tax increase due next April.

Facing criticism of over-reliance on monetary policy, Abe may choose the G7 meeting to unveil his fiscal initiatives. The G7 may issue its traditional boilerplate statement, reaffirming market-driven exchange rates. As hosts, Japan will likely insist on retaining the recognition that excessive volatility needs to be avoided. There is also likely to be a call on those with the ability to boost domestic demand.

BOE Carney's recent allusion to negative interest rates being a form of currency manipulation may be theoretically true, but is a different story in practice. The yen has appreciated 11.5% since the BOJ adopted negative interest rates. The euro has depreciated since the ECB pushed deposit rates into negative territory in June 2014. However, the cyclical low for the euro was set in March 2015, more than a year ago, and rates have been cut further since then. Any new initiative will likely wait for the G7 Summit (heads of state rather than finance ministers and central bankers) at the end of the following week.”