The US dollar continued its ascent against the Japanese yen during Asian trading hours on Monday, June 8th, buoyed by robust US employment figures and heightened geopolitical tensions in the Middle East boosting demand for the dollar as a safe-haven asset. The USD/JPY pair traded near 160.35, poised to extend its winning streak to seven consecutive sessions. Weak economic data from Japan further exacerbated the yen's weakness, providing additional upward momentum for the currency pair.
Revised data released on Monday showed Japan's economy lost momentum in the first quarter of this year, with growth slowing on a quarterly basis, primarily dragged down by sluggish business capital expenditure. The revised annualized GDP growth rate was 1.8%, lower than the preliminary reading of 2.1% but slightly above economists' consensus forecast of 1.3%.
Facing pressure from rising energy costs due to Middle East conflicts, the Japanese government has approved a supplementary budget of $19 billion to alleviate household burdens. Meanwhile, the Bank of Japan is expected to proceed with a further interest rate hike at its meeting later this month, barring a severe escalation of the Middle East situation.
First-Quarter GDP Growth Revised Downward, Capital Expenditure the Main Drag
Revised GDP data from Japan's Cabinet Office on Monday showed the economy grew at an annualized rate of 1.8% in the first quarter, lower than the initial estimate of 2.1% but higher than the median economist forecast of 1.3%. On a non-annualized quarterly basis, GDP expanded by 0.5%, slightly above market expectations of 0.3% and unchanged from the preliminary figure. Overall, the Japanese economy maintained an expansionary posture in Q1, though the pace of growth moderated from earlier estimates, indicating a weakening growth momentum.
From a structural perspective, private consumption, which accounts for over half of Japan's economy, grew by 0.3% quarter-on-quarter, consistent with the initial reading. This suggests household spending displayed a degree of resilience, providing a foundational support for the economy despite rising living costs due to higher energy prices.
However, business capital expenditure became the primary drag on the economy in the first quarter. Data showed capital spending contracted by 0.7% quarter-on-quarter, a significant downward revision of one percentage point from the initial reading of a 0.3% increase. This indicates that what was initially seen as a positive signal for corporate investment actually turned into a contraction.
Analysts pointed out that the surge in energy prices and global supply chain uncertainties stemming from Middle East conflicts are likely the main reasons for businesses postponing or reducing investments. Although the 0.7% decline was better than the market expectation of a 0.9% drop, the signal of investment turning from positive to negative warrants caution.
In terms of external demand, net exports (exports minus imports) contributed 0.3 percentage points to GDP, unchanged from the preliminary figure. Domestic demand contributed 0.2 percentage points, also unrevised. This indicates net exports were the primary driver of Q1 economic growth, while the contribution from domestic demand was relatively limited, with the modest growth in private consumption unable to fully offset the decline in capital expenditure.
Middle East Conflict Elevates Energy Costs, Posing Serious Challenges for Japan's Economy
Mathieu Savary, Chief Developed Markets Strategist at BCA Research, noted that Japan is one of the most directly and vulnerably impacted major economies by the Middle East situation. He highlighted a key statistic: Japan's oil and natural gas imports account for approximately 3.2% of its GDP, a proportion second only to South Korea among major economies and significantly higher than that of the US and eurozone nations.
Savary warned that if the blockade of the Strait of Hormuz persists longer than expected, the probability of Japan falling into a recession would rise significantly. This assessment is based on two core factors: Japan's extremely high dependence on Middle Eastern oil with few alternative sources, and its exceptionally low energy self-sufficiency rate compared to other developed economies, leaving it with little strategic buffer capacity.
Persistent increases in fuel costs are impacting the Japanese economy through three main channels.
The first channel is the push for higher inflation. The surge in energy prices is directly reflected in electricity and gas bills, driving up the overall Consumer Price Index (CPI). For Japan, which has just emerged from deflation, imported inflation is not a positive development as it erodes real purchasing power rather than representing benign inflation driven by overheated demand.
The second channel is the erosion of household purchasing power. Due to chronically weak wage growth in Japan, the increased cost of living from rising energy prices is difficult to offset through income growth. This implies a decline in consumers' real disposable income, subsequently dampening private consumption. As private consumption accounts for over half of Japan's GDP and is a core pillar of economic growth, its weakness would have profound implications for the overall economy.
The third channel is the compression of corporate profit margins. Energy-intensive sectors such as manufacturing, transportation, and logistics face sharply rising cost pressures. For small and medium-sized enterprises in Japan, which typically operate on thin profit margins, this could lead to losses or even closures, thereby suppressing capital expenditure and employment. Once corporate investment willingness declines, the momentum for economic recovery would further weaken.
These three channels are interconnected and reinforce each other, forming a complete transmission mechanism through which energy price shocks impact Japan's economy. From inflation to consumption, and from profits to investment, every link is under pressure. If the blockade of the Strait of Hormuz persists, this shock could evolve from a short-term fluctuation into a long-term structural pressure, significantly increasing the recession risk for the Japanese economy.
Government Launches Supplementary Budget, Central Bank Expected to Hike Rates This Month
To mitigate the impact of rising energy costs from the Middle East crisis on Japanese households, the cabinet led by Prime Minister Sanae Takaichi approved a supplementary budget of $19 billion for the current fiscal year last Wednesday. These funds will primarily be used for electricity and gas bill subsidies and cash handouts to low-income families, aiming to curb rising utility bills and cope with increasing prices of daily necessities. Analysts note this measure is designed to prevent the energy shock from eroding household purchasing power and dragging down already weak private consumption. The government emphasized the need for "swift and powerful" measures to provide an economic safety net.
Concurrently, the Bank of Japan is expected to announce an interest rate hike at its policy meeting next week, unless the Middle East conflict escalates sharply and severely disrupts financial markets.
Media reports suggest a consensus for a rate hike is forming within the central bank, primarily based on inflation persistently exceeding the 2% target, yen depreciation raising import costs, and signs of wage increases by some companies. However, if a blockade of the Strait of Hormuz triggers a sharp spike in oil prices or severe financial market turmoil, the central bank may choose to stand pat to maintain financial stability.
Overall, the Japanese government and central bank are addressing the challenges from fiscal and monetary policy ends respectively: the government focuses on supporting livelihoods, while the central bank works on policy normalization.
Technical Analysis of USD/JPY
The daily chart for USD/JPY shows a clear bullish uptrend, with prices oscillating higher from the March low near 155.53 and currently approaching the previous high area around 160.45. The moving average system is in a bullish alignment, with prices above the MA20, MA50, MA100, and MA200. Key support levels below are at 159.19, 158.86, and 155.42, indicating the medium-term uptrend structure remains intact.
Regarding technical indicators, the MACD histogram continues to expand, with the DIFF line above the DEA line, suggesting bullish momentum is still strengthening. The RSI is near 64.6, not yet in overbought territory, indicating room for further upside. The immediate core resistance lies in the 160.45-160.50 range. A break above this zone could open up new upward space, while a rejection could see support tested around the 159.40-158.86 area. Overall, the exchange rate is in a high-level consolidation phase with a clear bullish bias. Subsequent focus will be on whether it can break the previous high and on fundamental developments.
As of 10:44 Beijing Time on June 8th, USD/JPY was trading at 160.34/35.
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