Japanese Yen gains against weaker US Dollar following softer Q2 GDP data

• Japan’s Preliminary Q2 GDP grew 0.3% quarter-over-quarter, missing expectations of a 0.5% expansion.
• Annualized GDP reached 1.1%, complicating the Bank of Japan's path toward further rate hikes.
• US Retail Sales fell 0.6% in July, lowering market expectations for upcoming Fed rate hikes.

USD/JPY loses ground for the second successive day, trading around 159.10 during the Asian hours on Monday. The pair depreciates as the Japanese Yen JPY) remains stronger following the release of Japan’s preliminary Q2 Gross Domestic Product (GDP) data.

Japanese economy expanded 0.3% over the quarter in Q2 2026, following a 0.5% growth in Q1 and falling short of market expectations of 0.5%. On an annualized basis, Japan’s GDP grew 1.1%, compared with forecasts of 2.0% and the previous quarter’s 1.8% growth. A GDP print this far below expectations complicates the Bank of Japan's (BoJ) path toward further policy normalisation, given the central bank has been leaning on steady domestic demand to justify additional rate hikes after moving away from ultra-easy policy.

Yen steadies as Japan officials take comfort in recent gains

Strategists at Scotiabank 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 (USD) edges lower amid weaker-than-expected US economic data and shifting central bank expectations. Retail Sales in the United States fell by 0.6% month-over-month in July, following a 0.2% rise in June, coming in below the market consensus of 0.1% growth. On an annual basis, Retail Sales rose 5.0% in July compared to 6.8% in the previous month.

Consequently, traders have reduced their bets on Federal Reserve rate hikes following a slew of softer US data, including CPI, PPI, and Retail Sales. Markets are now pricing in a 33.1% chance of a rate hike next month, down from 44% last week according to the CME FedWatch tool.