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My latest video, discussing the BOJ and the outlook for the JPY.
Real economy developments still look negative for inflation. That the deflator nonetheless looks to be turning can be partly attributed to local food prices and global commodity prices. However, I think monetary factors are also playing a role, with three dynamics in particular worth highlighting.
The post-August rise in PPI continued in November, with one driver being the JPY-driven rebound in import prices. All told, upstream price pressures remain firm, and suggest that CPI isn't likely to ease much over the next 6M.
Today's inflation data weren't surprising, with the big shift being food prices lifting CPI. Non-food prices aren't rising, but in level terms aren't falling either, which is an improvement from 1H25. Nominal growth should look better through Q126.
There is little growth in exports outside of tech in general, and semiconductors specifically. But the surge in chip exports is big enough to offset all the weakness in other products. The overall trade surplus eased back in November, but the bilateral surplus with the US reached 25% of Taiwan GDP.
The supplementary budget looks big, but this year's fiscal deficit is still budgeted to narrow. Gross debt is high, but the government's net liabilities have fallen. Interest rates have risen, but before Takaichi took office, net annual interest payments by the government had fallen to near zero.
A few releases today – October wages and CA, November Economy Watchers survey, and Q3 revised GDP. The overall picture is mixed, though the acceleration in inflation and drop in real wages into early 2025 has now stabilised, and that is allowing an improvement in household sentiment.
The weakness in exports of October reversed in November, with a rebound in growth to ROW, and shipments to the US stabilising. Auto shipments reached a new all-time high, and are growing as quickly this year as in the initial take-off in 2023-24. Import demand declined, so the trade surplus rose.
Regional themes: lessening deflation in China, but no sign of real recovery; the BOJ is likely to hike this month, but the JPY needs a hawkish hike; outflows into overseas equities in Korea change usual exchange rate relationships; inflation risks in Korea and Taiwan if AI chip demand is sustained
The big shift in Korea's BOP since 2020 has been the rise in overseas buying of equities. That outflow surged anew in October to a record high, and by offsetting the large current account surplus, has helped keep $KRW near record highs.
High-frequency data show upstream prices remained stable in November, while food prices have been rising. The combination points to a further lessening of headline deflation. I doubt that signals a real turn in nominal growth, though there are now some upside risks.
My latest video, focusing on Taiwan and Korea, and a podcast in which I discuss the outlook for the broader region.