Japan’s Q2 GDP shows deepest annualized contraction on record

Japan’s Q2 GDP disappointed with an annualized -27.8% quarter-on-quarter (QoQ) reading as consumption and exports plunged in Q2. Covid-19 implications may continue to weigh on the Japanese market.

Consumption, exports drag on Q2 GDP

Amid the onslaught of Covid-19’s spread to the global economy, Japan had likewise seen its Q2 GDP taking an unprecedented hit as far as the record for annualized GDP went. At 27.8% QoQ decline, that had been the worst on record, with the last time a double-digit percentage drop seen back in Q1 2009 at -11.7%.

Drilling down to the details of Q2 GDP performance, one would find exports of good and service performing the worst in percentage terms at a seasonally adjusted -18.5% and -56.0% annualized. Meanwhile private demand, which consists of both private and household consumption, saw a poor -8.2% QoQ drop and -23.5% in annualized terms. While the large-scale economic support jointly issued from both the government and central bank had helped to see business spending clock a shallower than expected drop, the aid had been limited to arrest the fall in consumption broadly.

As it is, Japan had already been in technical recession ahead of the Q2 GDP release with shaky recovery from the tax hike in October 2019 meeting the Covid-19 hit. One would note that Japan had, in line with other parts of the world, seen signs of recovery into June with retail sales surprising with a smaller-than-expected drop in Japan. That said, a second, nastier, wave of Covid-19 that struck into July remains at risk in weighing on consumption. This is while the export outlook remains bleak as the global demand struggle with the uncertainties.

Japan Nikkei 225 may find gains capped moving forward

The Japanese Nikkei 225 had seen some gains of late, specially having printed a near 6-month high last week with USD/JPY edging forth to briefly touch the $107 level on the USD rebound. That said, the uncertain outlook for the Japanese market coupled with potential for USD/JPY (大口） gains to be capped may likewise find the recovery for Japanese equities stalling ahead.

Amid the weak risk sentiment expected with geopolitics and limited room for yield differentials to depart further in a significant manner, we could be seeing USD/JPY one to find greater risks to the downside and in turn driving Nikkei 225 moves here. Risks to this view will include a speedy passage of additional US fiscal stimulus or a significant improvement of conditions on the Covid-19 front, although not expected in the short-term. From a technical perspective, the 24,000 level forms a strong resistance for prices. A firm break here could indicate that momentum has picked up once again, though a strong trigger may be needed for such an occurrence.