The US dollar rose against most major currencies during Tuesday’s trading as the government shutdown continued and concerns grew over its impact on the economy.
The most notable movement at the start of this week was the sharp decline in the Japanese yen, which fell by 1.6% against the dollar on Monday following Takaichi’s victory. Her unexpected win strengthened expectations for continued fiscal stimulus while reducing bets on an imminent interest rate hike by the Bank of Japan (BoJ). This uncertainty pushed both gold and bitcoin to record highs when priced in Japanese yen.
Although Takaichi’s post-victory statements about reconsidering the Bank of Japan agreement and “owning monetary policy” attracted attention, she has recently softened her tone opposing interest rate hikes, after having described them last year as a “stupid move.” This indicates that a full return to the peak of the Abenomics era is unlikely, especially since the Liberal Democratic Party (LDP) is currently governing as a minority government.
In contrast, reading the state of the US economy remains complicated due to the ongoing government shutdown, which has significantly reduced economic visibility. Still, this shutdown represents a tangible drag: S&P Global Ratings estimates it could subtract between 0.1 and 0.2 percentage points from GDP growth for every week it continues.
As for the limited data available — such as the JOLTS report and the September estimates from ADP and Revello Labs — they continue to indicate that the United States is experiencing a “no hiring, no firing” economy, characterized by extremely slow turnover and modest but positive job gains.
So, what can the Federal Reserve (Fed) do under these circumstances?
Despite the shutdown and the lack of new official data, the Fed is forced to draw signals from private-sector indicators and its broad communications network with businesses. So far, markets are pricing in another 25-basis-point interest rate cut by the end of the month.
Here lies a key paradox: how can the apparent weakness in the labor market — slow or stagnant job growth — coexist with solid economic growth projections such as the Atlanta Fed’s estimate of 3.9% GDP growth in the third quarter?
The answer likely lies in the sharp rise in labor productivity. GDP measures total economic output, and if companies produce more goods and services without hiring additional workers, output rises even if employment does not.
This trend is driven by strong capital expenditure (Capex) on technology, especially artificial intelligence (AI) and automation.
Companies are investing capital to improve the efficiency of their existing workforce, increasing productivity per working hour and raising GDP while the number of employees remains unchanged.
The result is a temporary but strong disconnect between rising profits and production on one hand and slow job creation on the other.
The “weakness” in the labor market is not only the result of weaker demand but also of reduced labor supply.
Structural factors — such as lower immigration rates and demographic trends like the retirement of baby boomers, as noted by the St. Louis Federal Reserve — have reduced the “equilibrium” employment growth rate needed to maintain stable unemployment.
This means limited job gains are not necessarily a sign of an impending recession, but rather of a structural scarcity in labor supply.
Moreover, short-term GDP figures can be affected by volatile factors such as sharp declines in imports, creating an impression of stronger growth that does not immediately reflect in job creation.
In the end, these interactions highlight an economy growing more efficiently, increasingly driven by capital-intensive technology, with limited labor-force expansion.
As for central banks, this week remains busy; the minutes of the Federal Open Market Committee (FOMC) meeting are expected on Wednesday, followed by a speech from Fed Chair Jerome Powell on Thursday.
Elsewhere, the Reserve Bank of New Zealand (RBNZ) will be in focus on Wednesday, with a widely expected 25-basis-point rate cut, while the Norges Bank will speak today and the Reserve Bank of Australia (RBA) on Friday.
