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19 May 2025,05:54

Daily Market Analysis

Japan’s Economy Contracts Sharply, Clouding Outlook for BOJ Tightening and Yen Strength

19 May 2025, 05:54

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Key Takeaways:

*Japanese GDP came short, casting fresh doubt on the Boj’s monetary tightening policy. 

*Japan is falling behind on trade talks with the U.S., exerting pressure on the country’s economy. 

Market Summary:

Japan’s economy shrank for the first time in a year, with GDP contracting by 0.7% in the latest quarter, exceeding economists’ expectations for a softer pullback. The steeper-than-anticipated decline casts fresh doubts on the Bank of Japan’s path toward monetary tightening, raising concerns over the strength of the Japanese yen.

The outlook has been further darkened by a series of headwinds, including tariff pressures and corporate earnings downgrades. Major automakers such as Honda and Toyota have slashed their earnings forecasts in the wake of the U.S. administration’s aggressive tariff policies. The auto sector — a pillar of Japan’s economy — is facing rising input costs and margin pressure amid the largest wage increases in decades.

Japan’s trade position has also deteriorated. A drop in exports combined with a surge in imports led to a wider trade deficit, further weighing on the yen. Additionally, Japan appears to be lagging behind in its trade negotiations with the U.S., particularly as Washington rolls out a sweeping 100% tariff on imported vehicles — a move that could significantly impact Japanese carmakers.

Together, the weak macro data and geopolitical uncertainty may limit the BOJ’s policy normalization and add downside risk to the yen in the near term. 

Technical Analysis:

NZDJPY, H4 

The New Zealand dollar slipped below its long-term support at the 86.15 level against the yen, marking a key structural break and reinforcing a bearish outlook for the pair. The downside move signals a shift in sentiment, potentially paving the way for a deeper correction.

However, a bullish engulfing candlestick pattern in the latest session has introduced the possibility of a short-term technical rebound. Still, unless NZDJPY reclaims and sustains levels above the 86.15 resistance, the broader downtrend remains intact.

Momentum indicators support the bearish bias. The Relative Strength Index (RSI) is nearing the oversold threshold, indicating that while a bounce may be near, downside pressure persists. Meanwhile, the MACD has crossed below the zero line and continues to diverge negatively, suggesting growing bearish momentum and the potential for a prolonged downtrend.

Resistance Levels: 86.15, 87.45

Support Levels: 85.05, 83.85

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