The Japanese Cabinet announced today that Japan’s GDP for the third quarter grew at an annualized rate of 1.2% compared to the previous quarter, surpassing economists’ estimate of 1%. This indicates that the Japanese economy is performing better than expected, giving the Bank of Japan more confidence to raise interest rates at its decision on December 19. Economists believe that there is over a 50% chance of a rate hike in December.
The growth in Japan’s GDP is seen as evidence supporting the Bank of Japan’s view that the country’s economy will expand moderately. The decrease in net exports and capital expenditures has also narrowed, and there has been an upward revision in inventory growth.
In the upcoming central bank week, the Bank of Japan will announce its benchmark interest rate on December 19 (the US is expected to announce a rate cut on December 18). Bloomberg predicts that Bank of Japan Governor Kazuo Ueda will carefully study economic data, including the short-term survey conducted on December 13, before making a decision.
Ueda recently stated in an interview with the Nikkei newspaper that the next rate hike is approaching. The better-than-expected GDP data released today has deepened speculations in the market about a rate hike by the Bank of Japan this month.
Yukazu Kodama, an economist at Meiji Yasuda Research Institute, stated, “Today’s data once again confirms that the Japanese economy is steadily recovering.” He believes that there is over a 50% chance of a rate hike in December for the Bank of Japan, but due to the recent slight appreciation of the yen, the central bank may postpone the decision until January next year.
In addition, Bloomberg economist Taro Kimura stated that considering all factors, they believe that the Bank of Japan will consider this GDP report as evidence that the economy is strong enough to withstand further reduction in stimulus measures.
Will there be another wave of unwinding yen carry trades?
You may recall that in late July, the Bank of Japan decided to raise interest rates by 15 basis points, and at the same time, the Federal Reserve of the US was preparing to cut rates. This caused the yen to surge and compressed the profit margin for the “borrow low-interest yen, buy high-interest currencies” carry trade, leading to a large number of investors unwinding their positions and impacting global stock and currency markets in early August.
Although investors have had some time since August to prepare for possible catastrophic consequences, if the Bank of Japan really decides to raise interest rates in December, it will be the second action after the rate hike in July this year. The risk of unwinding yen carry trades may resurface, potentially impacting global capital markets.
On August 5, Bitcoin plunged to $48,900, the S&P 500 index plummeted 3% marking the largest single-day drop since September 2022, and the Nikkei 225 index experienced a sharp decline of over 12%. Global markets faced selling pressure. 