USD/JPY: Yen Rises as Japan GDP Lands Above Estimates in First Quarter. Rate Hikes Ahead?

Contraction of 0.2% year-on-year was an improvement from a prior 0.7% drop. Quarter-on-quarter growth was flat. What does this mean for interest rates?

💪 Yen Gains Ground

• Japan’s economy shrunk less than feared in Q1, with annualized GDP contracting just 0.2% — a significant upward revision from the prior estimate of a 0.7% drop.
• The quarter-on-quarter figure was revised to flat, erasing concerns of back-to-back contractions and sparking modest optimism about Japan’s economic footing.
• The USDJPY pair slipped 0.5% to ¥144.20, as traders recalibrated rate expectations and positioned for potential hawkish signals from the Bank of Japan in the weeks ahead.

📞 Rate Hike Questions

• The softer contraction and improved consumption data have revived the debate over whether Japan might continue normalizing rates — especially as inflation remains sticky and core prices climb.
• While the BoJ remains cautious, the market is now pricing in a higher chance of a late-2025 rate hike, with the yen firming on bets of a shift in monetary tone.
• Still, many analysts caution that economic momentum remains weak, and the revision, while welcome, doesn’t yet signal a sustained recovery.

🚚 Tariff Tension Looms

• The upbeat GDP revision does little to calm nerves about Trump’s looming 24% tariff on Japanese goods, set to take effect in July unless a deal is reached.
• Japanese policymakers now face pressure to strike a deal quickly, as the trade threat clouds forecasts for investment, exports, and corporate sentiment.
• For the yen, these geopolitical risks are acting as both a shield and a sword — attracting haven flows but also injecting fresh volatility into JPY crosses.