As global financial markets gear up for the upcoming release of Japan's Q3 GDP report on Wednesday at 01.50 GMT, expectations and speculation are high. The anticipation is partly fueled by the somewhat underwhelming outcome of the recent Bank of Japan (BoJ) meeting, which left markets feeling somewhat dissatisfied. Despite Governor Ueda's incremental steps towards normalization, the meeting's outcomes did not meet the high expectations set by investors and analysts. At this meeting, a significant update was made to the famous yield curve control mechanism, transforming the 1% hard cap into a reference cap.
This allows the 10-year Japanese yield to trade above this level, with the BoJ prepared to intervene forcefully if the pace of adjustment is deemed excessively rapid. In line with this, the Policy Board’s median forecasts for core CPI were revised upward for the fiscal year of 2024 to 2.8% from 1.9%, with the 2025 forecast at 1.7%. This cautious stance reflects the BoJ's wait-and-see approach, as it seeks stronger signs of sustainable domestic demand supporting current inflation rates.
Interestingly, Japan's UA Zensen Union, mainly representing manufacturing sector workers, has demanded a 6% wage increase for the second consecutive year. Additionally, one of Japan's leading banks raised its deposit rates for the first time in 12 years. These developments are positive indicators for the BoJ, but not yet sufficient for the central bank to implement its first rate hike since 2007. Governor Ueda is closely monitoring for signs of a fundamental shift in public perception towards higher wages and rising prices.
Recent economic indicators have shown promise, with PMI surveys exceeding expectations and a 1.2% year-on-year increase in labor cash earnings in September. While these figures might seem modest compared to other developed nations, they align closely with the BoJ’s targets. This week, the market's focus will be on the preliminary GDP figures for Q3 2023. After a strong Q2, there is a possibility that the data could surpass the current -0.1% QoQ expectation. Moreover, the GDP price index, which exceeded the 2015 high of 3.4% in the previous quarter, will be closely watched. Thursday’s trade balance data for October will also be critical, especially any indications of a rebound in imports, which have fallen from 2022 highs.
In the currency markets, the euro-yen pair continues to surge, reaching new highs in 2023 and potentially targeting the April 23, 2008, high of 164.97. The possibility of Japanese intervention, so far limited to verbal warnings, does not seem to deter euro bulls. A robust GDP report might trigger a temporary bearish reaction, with the bears eyeing the 159.64 level. Conversely, a series of weaker data releases could further embolden the euro-yen bulls, testing the Japanese authorities' tolerance in the currency market. In summary, the upcoming GDP report, along with other key economic indicators, holds significant potential to influence market sentiment and expectations around the BoJ's future policy decisions, particularly regarding the yen's performance in the currency markets.