Yen weakens after Japan GDP misses expectations

Yesterday 11:50

By: Dakir Madiha

Yen weakens after Japan GDP misses expectations

The Japanese yen retreated in early Asian trading on Monday after posting its strongest weekly performance since November 2024, as weaker than expected economic data dampened expectations of a near term interest rate increase by the Bank of Japan.

The currency slipped 0.2 percent to 153.07 per dollar, trimming part of last week’s nearly 3 percent surge, which marked its biggest weekly gain in about 15 months, according to Reuters. The pullback followed the release of Japan’s fourth quarter gross domestic product figures, which showed the economy expanding at an annualized pace of just 0.2 percent, well below the median economist forecast of 1.6 percent.

Last week’s rally had been fueled by renewed investor confidence after Prime Minister Sanae Takaichi’s landslide election victory on February 8, when her Liberal Democratic Party secured a commanding majority in the lower house of parliament. The result eased concerns over fiscal stability and strengthened expectations that Takaichi would pursue targeted economic stimulus while maintaining budget discipline.

Market participants described the currency’s appreciation as part of broader positioning around a “Buy Japan” theme. Naka Matsuzawa, chief market strategist at Nomura Securities in Tokyo, said the yen had become a preferred instrument for investors seeking exposure to Takaichi’s pro growth agenda.

The currency strengthened for four consecutive sessions against the dollar following the election, supported in part by safe haven demand amid broader weakness in risk assets. Momentum faded after Monday’s data showed private consumption rising only 0.1 percent and capital spending increasing just 0.2 percent, both below expectations.

Despite the softer growth figures, analysts continue to forecast further downside for the dollar yen pair over the medium term, reflecting expectations of multiple Bank of Japan rate hikes this year. Kenya Koshimizu, co head of global markets at Mizuho, said the central bank could raise rates as soon as March and potentially deliver up to three increases during 2026.

Board member Naoki Tamura signaled last week that there is a strong likelihood the bank will sustainably achieve its 2 percent inflation target around spring, reinforcing views that policy normalization will continue. The Bank of Japan raised its benchmark rate to 0.75 percent in December, the highest level in three decades.

The broader “Buy Japan” investment strategy continues to attract long term capital despite the yen’s pullback. BlackRock noted that flows from Australian investors into Japanese equities tripled last year as investors sought diversification beyond US markets, with the Nikkei 225 surpassing 50,000 points in late 2025.

Traders are now watching upcoming trade and inflation data for further clues on the Bank of Japan’s rate path. Yosuke Miyairi, a currency and rates strategist at Nomura, said the dollar yen exchange rate could move toward 150 if narrowing interest rate differentials between the United States and Japan are accompanied by perceptions of stronger fiscal discipline under Takaichi.