Key Moments:

• The Japanese yen rallied on Monday, climbing 0.48% against the US dollar.
• Japan’s economy contracted 0.2% from last year, improving from a 0.7% decline.
• Market expectations of a potential rate hike in 2025 have grown.

Economic Revision Lifts Sentiment

Japan’s economic outlook brightened slightly after new figures revealed a year-over-year GDP drop of 0.2% during 2025’s first quarter, marking an improvement from a previously reported 0.7% decline. On a quarterly basis, growth remained flat, signaling that while the downturn has eased, momentum is still lacking.

The data served to boost the Japanese yen’s appeal, which gained ground during Monday’s trading session. At the time of writing, the US dollar is down by around 0.5% against the yen, and the USD/JPY is hovering around 144.11.

Investor Focus Turns to Rates as Trade Threats Complicate the Outlook

The updated GDP data, combined with resilient consumption and persistent inflation, has intensified speculation about the Bank of Japan’s next steps. Although the central bank continues to proceed cautiously, rising core prices and sticky inflation have prompted the market to wager on a greater chance of a rate hike toward the end of 2025. This shift in sentiment contributed to fresh support for the yen.

Despite the currency and policy speculation, some analysts remain wary. They argue that the revised figures fall short of indicating a solid economic rebound.

Moreover, looming trade risks continue to serve as an obstacle to further growth. A 24% tariff on Japanese exports to the US, proposed by President Donald Trump, is scheduled to take effect. While the US and Japan have engaged in trade negotiations, thus far, there has been no confirmation that the duty would see any changes or be removed altogether. This pending barrier is pressuring Japanese officials to expedite trade discussions.