USD/JPY is trading just below 155.00 after Japan’s Q3 GDP contracted less than expected and domestic demand held firm. Despite reduced market pricing for a December BOJ hike, rising fiscal support may raise the likelihood of policy tightening later this year, BBH FX analysts report.

Japan economy shrinks less than expected

"USD/JPY is firmer just under its next resistance at 155.00. Japan Q3 real GDP fell less than expected. The economy shrank -0.4% q/q (consensus: -0.6%) after rising 0.6% in Q2. The decline was driven by residential construction - due to stricter environmental standards - and exports – due to front-loading shipments ahead of US tariffs. Importantly, private domestic demand is resilient. Household consumption rose 0.1% q/q vs. 0.4% in Q2 and private non-residential investment increased 1% q/q vs. 0.8% in Q2."

"The swaps market trimmed odds of a December BOJ rate hike to 30% from 50% last week on concerns the Takaichi administration will pressure the BOJ to hold off on raising interest rates. In our view, the markets are underpricing the risk of a December 19 BOJ rate increase given that fiscal support is set to be ramped up. Japan’s Prime Minister Takaichi is planning a fresh package of economic measures that is likely to exceed last year's ¥13.9 trillion (2.2% of GDP) supplementary budget."