East Asia Econ

Today's summary release of the BOJ Tankan shows output prices rising, inflation expectations up, and the labour market tight. At the same time, business sentiment – at least for now – remains solid. Upside risks to inflation are growing again.

More interesting than today's data releases were yesterday's BOJ documents, on trends in underlying inflation, and the summary of opinions of the March MPB meeting. The BOJ is concerned about the negative TOT shock from the Middle East, but sounds more worried about upside risks to inflation.

The sharp rise in input prices in today's PMIs move China back towards rising YoY PPI for the first time since 2022. Usually, higher prices would boost PMIs too. With the rise in prices externally-driven, that is less likely now. But, I think some inflation does improve the macro cycle for China.

Some charts on regional energy supply and government attempts to cushion the impact of rising energy prices since 2022. Rough rule of thumb: spending 1% of GDP on energy subsidies leads to a reduction in headline CPI inflation of around 1ppt.

This week's three themes: 1) rising inflation despite government attempts to hold prices down; 2) growth that might be starting to wobble but hasn't clearly turned down yet; and 3) huge uncertainty about the direction of events in the Middle East.

The easy takeaway from the rise in prices and fall in sentiment in the BOK's business sentiment survey for March/April is stagflation. I think there are reasons as yet to discount the idea that activity has slowed, but if that is right, then the rise in inflation makes BOK rate hikes more likely.

Headline inflation data continue to be affected by policy measures to control energy and public services prices. The underlying picture is more stable, with core private services inflation of around 2%, PT wage growth of 5%, and PMIs above 50. The big risk, of course, is the impact of the Iran war.

In the first stage of the Iran War, China has been the relative winner, and Japan the loser. The next stage would be yet higher energy prices that challenge the sustainability of efforts to control inflation for consumers, and mean economies start to face a negative demand shock too.

1) Goods and services output growing ~5% is enough for Beijing; 2) money and credit growth don't suggest a lot of change in that underlying trajectory; 3) nominal momentum is improving, with an end of PPI deflation now a real possibility; 4) the likelihood of further monetary easing is falling.

It isn't yet all about the war, given the real strength in semi demand. That backdrop is one reason to think underlying inflation will be lifted by the latest crisis. The durability of the AI cycle will also be the canary in the mine for a negative supply shock becoming a negative demand shock.

The annual survey of firm behaviour in Japan's shows the structural rise in inflation expectations is continuing. Today's official February PMI in Taiwan points to higher input prices even before the oil price hit. Like the rest of the region, the PMI also shows strengthening cycle momentum.