Japan’s Preliminary Q2 GDP increased by 0.3% on a quarter-over-quarter basis, falling short of the anticipated 0.5% growth. Annualised GDP reached 1.1%, complicating the Bank of Japan’s trajectory toward additional rate hikes. US Retail Sales declined by 0.6% in July, which has dampened market expectations regarding forthcoming Federal Reserve rate increases. USD/JPY experiences a decline for the second consecutive day, currently trading near 159.10 during the Asian session on Monday. The pair depreciates as the Japanese Yen remains stronger following the release of Japan’s preliminary Q2 Gross Domestic Product data.
The Japanese economy experienced a 0.3% expansion in the second quarter of 2026, a deceleration from the 0.5% growth recorded in the first quarter, and it did not meet market expectations of 0.5% growth. On an annualised basis, Japan’s GDP expanded by 1.1%, falling short of forecasts that anticipated a growth rate of 2.0% and below the previous quarter’s growth of 1.8%. A GDP print this far below expectations complicates the Bank of Japan’s path toward further policy normalisation, as the central bank has been relying on steady domestic demand to justify additional rate hikes following its shift away from an ultra-easy policy.
Strategists note that the recent firming in JPY is easing some of the pressure on policymakers, with the “modest gains” in the currency “likely providing considerable reassurance to key officials at the Ministry of Finance, given ongoing concerns about the yen’s downward trajectory.” Meanwhile, the USD/JPY pair depreciates as the US Dollar edges lower amid weaker-than-expected US economic data and shifting central bank expectations. In July, retail sales in the United States experienced a decline of 0.6% month-over-month, a reversal from the 0.2% increase observed in June.
This outcome was below the market consensus, which anticipated a growth of 0.1%. On an annual basis, Retail Sales increased by 5.0% in July, a decline from the 6.8% growth observed in the preceding month. Consequently, traders have diminished their positions on Federal Reserve rate increases in light of a series of weaker US economic indicators, encompassing CPI, PPI, and Retail Sales. Markets are currently estimating a 33.1% probability of a rate increase next month, a decrease from the 44% observed last week as per the CME FedWatch tool.
