GDP: Six Years of Zero Growth

A Brief Note On The Yen

Source: Cabinet Office at https://www.esri.cao.go.jp/jp/sna/data/data_list/sokuhou/files/2024/qe241/tables/gaku-jk2411.csv

Japanese GDP in the first quarter of this year is no higher than six years ago: in 2018 (see chart on top). Moreover, household consumption is 3% below where it was in 2018. The economy has still not gotten over the twin shocks of the October 2019 hike in the consumption tax followed by Covid.

Nor did business investment fare much better. It is still down 1% from 2018.

What has kept GDP from doing any worse is a hike in government spending, which is up 8% from 2018.

Despite the big depreciation of the yen, exports have hardly soared; they’re just 4% above their level six years ago.

Yen Follows American Treasury Bond Interest Rate

For a long time, I’ve been tracking the ups and downs of the yen/$ and its relationship to the interest rate gap between American and Japanese ten-year government bonds. Lately, however, this indicator has not worked well and that has been frustrating. As seen in the chart below, the yen depreciated far more than would have been predicted by looking at the rate gap.

Source: Wall Street Journal

So, I decided to look at how the yen/$ tracked the US Treasury bond alone and that is now working much better than the rate gap, as seen in this chart.

Here’s my working hypothesis. Traders care not just about where interest rates are today, but where they are going and how quickly they’ll get there. They apparently believe that what the Fed does, and how the US market responds to its guesses about Fed action, is far more important than what the Bank of Japan does. So, for them, daily movements in the US bond interest rate contain more information about the future than movements in Japan Government Bonds. No indicator is a good predictor forever, but, for now, the US bond seems to be the indicator to watch.

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