USD/JPY: Yen gains despite Japan slipping to 4th largest economy

The yen rose against the dollar on Thursday to 150.03, rebounding from a three-month low despite data showing Japan has lost its title as the world’s third-largest economy. The economy unexpectedly contracted 0.4% in Q4, entering a technical recession.

However, currency officials’ warnings against “rapid” yen moves boosted the currency. Markets still expect a Bank of Japan rate hike in April, pricing policy outlook over growth figures.

Japan slipped behind Germany’s $4.4 trillion economy, now worth $4.2 trillion. But economists say if the weak yen recovers, Japan could regain the third spot.

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While the recession may delay a rate hike, upcoming spring wage negotiations are more important to policy. The contraction, following a 3.3% Q3 slump, defied forecasts of over 1% growth.

The IMF will only formally declare ranking changes once final GDP data is published. But deputy head Gita Gopinath said the yen’s 9% slide against the dollar in 2023 was an important factor.

A cheaper yen has boosted exporter shares though, with the Nikkei 225 crossing 38,000 for the first time since 1990 this week. Its record high is 38,915 from December 1989.