Japan’s Gross Domestic Product figures were revised downward, revealing the economy expanded 0.9 percent in the fourth quarter versus the 1.1 percent gain reported in early estimates. The annualized growth rate was slashed to 3.8 percent from the significantly higher 4.6 percent preliminary figure. The outcome owed to a smaller-than-expected increase in capital investment and government spending. Exports remained the primary driver of expansion, accounting for 0.7 percent of the overall increase. Perhaps most disturbingly, the GDP Deflator fell 0.8 percent, revealing that prices fell at twice the rate of the previous quarter and seemingly assuring that the Bank of Japan will stick with its “extremely accommodative” posture and may even loosen monetary conditions further. This suggests the cost of borrowing in Japan will continue to decline after the interest rate on three-month Yen loans fell below that of comparable ones denominated in US Dollars for the first since August last week. This bodes ill for the Japanese currency as investors shift FX carry trade portfolios away from short-USD exposure and toward a short-JPY bias.
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