AUD/JPY: Yen Falls as GDP Shrinks Ahead of BOJ Policy Decision

The Japanese yen is deemed to dip alongside the Australian dollar today as the Japanese economy contracted for the third consecutive quarter in Q4, indicating that the country is struggling to escape from a mild recession. Likewise, the markets are awaiting the outcome of the Bank of Japan’s monetary policy meeting today.

Amid economic uncertainties overseas, Japan’s economy shrank at an annualized pace of 0.4 percent in the final three months of 2012 to contract for a third straight quarter. The figure considerably undershot expectations of a slight 0.1 percent expansion, underscoring the challenges the government faces in its efforts to revive growth. In the three-month period, exports sagged 3.7 percent to mark its second straight quarter of decline, while private expenditures dropped 2.6 percent. Inventories also dipped, contributing 0.2 point to the overall decline in the GDP as external demand remained muted. Weak exports tend to exacerbate a economic downsizing in Japan by discouraging investments in production facilities.

Economy Minister Akira Amari said that looking ahead, weakness could remain for the time being, but with the global economy expected to pick up, the economy will gradually recover. Nonetheless, the data indicate that with Japan’s key engines of growth, namely exports and corporate capital outlays in a slump, the nation will likely have to depend on government stimulus to stimulate the economy. With the figures validating Japanese Prime Minister Shinzo Abe’s campaign for additional aggressive stimulus program, from expanded monetary policy easing to new spending plans, the Yen is apt to decline today.

Meanwhile, the Bank of Japan concludes its two-day policy meeting today, and the markets expect the central bank to keep monetary setting unchanged today. The bank, however, could upgrade its assessment of the economy and deny global concern that the country is deliberately weakening the Yen. BOJ Governor Masaaki Shirakawa is anticipated to reinforce Tokyo’s stance that its monetary expansion policies are aimed at pulling the country out of deflation. The BOJ raised its inflation target to 2 percent last month and made an open-ended commitment to buy assets from next year, largely in response to Abe’s relentless calls for bolder action. Nonetheless, the central bank is believed to be holding off on expanding stimulus further as a new governor takes the helm in April. With expectations that Shirakawa’s successor will introduce more aggressive easing steps, the central bank will still likely signal its preparedness to expand stimulus again if economic conditions warrant them. Considering these, a long position is advised for the AUD/JPY trades today.

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