East Asia Econ

The main regional themes weren't challenged by events last week: macro stabilisation in China; upside risks to inflation, particularly in Japan; and upside risks to growth, a theme for both Taiwan and Korea as long as the energy crisis in the Middle East doesn't derail the semiconductor super cycle.

Data today for Japan and Korea show the inflationary impact of the War, with import prices in both economies rising at double-digit rates. However, such rises have been seen before. By contrast, export price inflation is setting records, offsetting the hit from energy prices to domestic growth.

The big trade story this year is the sudden rise in imports. There are some signs of firmer domestic demand. But 80% of the increase is from two categories alone: precious metals and semiconductors. And most of the semi strength is volumes, which is puzzling when global IC prices are rising so much.

The Iran War will push up inflation. But for growth, transmission is via the terms of trade, and higher import prices are being offset by historical rises in export prices, increases that are unlikely to be just cyclical. That supports growth in Asia, at the expense of even more inflation for ROW.

PPI inflation accelerated again in April, and with CPI inflation firm, the GDP deflator is on track to rise in Q2 for the first time in 2022. The turn is being led by energy and commodity prices. There are some signs of a stabilisation in underlying prices too, but so far, they are tentative.

Stabilisation in China seems to be becoming a more popular view. Hope is building for a BOJ hike in June, but one won't be enough. KRW should be strengthening, but likey needs more Middle East certainty. The big event for the region this week is the Xi-Trump meeting.

After doing nothing for 3 years, imports are suddenly growing 20%. Chips are one component, but while I thought that related to prices, official data show the bigger diver of overall imports is volumes. I am not sure that's because of domestic demand, but it is starting to reduce the trade surplus.

April trade data show little damage from the Iran war. If the crisis remains limited to energy prices, Taiwan should be somewhat insulated. Energy imports are small relative to chip exports, and while import prices will rise, export prices are now also increasing for the first time in a generation.

Latest video, discussing one of my main themes: that Taiwan macro is more relevant for global investors than it has been for a long time.

March data offer more evidence that the KRW just can't get a break. Finally, retail outflows into foreign assets eased, only to be replaced by huge domestic selling by overseas investors. That has normalised in April, so perhaps investors are realising that a CA surplus of 20%+ of GDP should matter

The BOK's current forecast assumes no GDP growth in the rest of the year, and contracting exports. But export growth still looks to be picking up, capex indicators are improving, and there is a tailwind from growth in real Gross Domestic Income in Q1 being faster than any time since the 1990s.

With the full consequences of the Iran War yet to be felt, the outlook remains uncertain. But so far, upside risks to inflation in the region are dominating the downside risks to growth. The big driver is the semiconductor cycle. The pack starts with regional themes, then 15 charts for each economy.