The Japanese yen is the star of the trading week so far. It has gained against most of its peers despite Japan’s Gross Domestic Product (GDP) declining for the second straight month.
An important week for the Japanese yen is about to end. It has appreciated against its peers, strengthening against rivals such as the euro, the British pound and the Australian dollar.
That is surprising considering the data that came out of Japan this week. Nevertheless, the Japanese yen is seen as a special currency, acting as a safe haven and closely correlated to the price action in equity markets.
Japan’s GDP dipped for the second month in a row in May, albeit marginally. Adjusted for inflation, it wad down 0.04%. The recovery is stalling, but that did not stop the Japanese yen from strengthening.
Passenger Vehicle Production Weighs on Japan’s GDP
Durables and the service sector were hit the hardest, while the passenger vehicle production declined too. To blame is the shortage of semiconductors, and this is expected to continue in the months ahead. On the positive side, capital investment by private companies jumped by 0.6%. All in all, both imports and exports dipped, by 2.6% and 0.2% respectively.
The Japanese yen outperformed this week, as seen in the price action on the EUR/JPY chart below. Since the start of the trading week, the Japanese yen has been in strong demand, with no pullbacks whatsoever.
Household spending surprised to the upside this week. It rose by 11.6% YoY against expectations of 10.9%, fueling the yen’s strength.
Moreover, the Leading Indicators for Japan, a level of a composite index that comprises eleven indicators, suggested the economy is in a good place. Furthermore, Economic Watchers Sentiment improved further, up to 47.6 on expectations of 33.9.
Moving forward, the key driver for the yen for the rest of the month may come from the price action in the equity markets. With the Olympic Games to be held without spectators, the Japanese economy will not benefit from the usual inflow of tourists during such an event. It may end up costing the Japanese a few percentage points in annual economic growth.