Japanese GDP Preview

Japan will report the Oct-Dec GDP figures on Monday. The pace of growth looks to be closer to the US than to the euro zone, which essentially stagnated (+0.1%). A news wire consensus is for Japanese growth to be around 3.6% (0.9% q/q) at annualized pace. And the risk seems to be on the upside after those spectacular jump in machine orders (+20.1% in Dec vs expectations of 8%).

External demand is the key driver of the Japanese economy. Asian demand, especially China has been vital to what recovery there has been in Japan. For the whole year of 2009, China surpassed the US as Japan's biggest trading partner. Net exports likely accounted for over half of Japan's growth in Q4.

However, there unquantifiable risk as well with the data and that would likely point to the downside. The Cabinet Office indicated last week that it would change the way it accounts for imports and exports on a seasonally adjusted basis to better allow for the anomaly created by the financial crisis in 2008. This could in effect lower the year-over-year comparison.

Nevertheless, the data is unlikely to sway the BOJ very much. There is little doubt that official rates in Japan are on hold for a long time to come. In fact, more important than foreign led growth, the GDP report will also likely show the deflationary forces have strengthened. The newswire consensus is for the GDP deflator to be -2.3% from a -0.5% reading in the previous three months.

The BOJ meets Wed and Thurs and while the growth numbers won't move it, the risk is that the deflationary forces could. There is still speculation that the BOJ could, at some point, increase its purchases of JGBs. Also ahead of fiscal year end the BOJ could extend the amount or tenor of the emergency facility announced at the end of last year.

The implication for the yen is far from clear. The yen seems to be largely moved by external factors. The dollar appears to have moved into a higher trading range against the yen recently and is flirting with a downtrend line drawn off the early Jan highs. A close above JPY90.30 would be constructive technically, but another bout of risk aversion could negate this quickly. Support for the dollar is initially pegged near JPY89.60. For short-term traders, a long yen position may be better against the euro or sterling, rather than the dollar.