East Asia Econ

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.

Today's quarterly business sentiment survey from the Cabinet Office and MOF in Japan shows the same bounce in manufacturing confidence that has been visible in the different monthly surveys. Korean job openings for January were weak, but that could reflect this year's rebasing of the data.

Exports in YoY and SA terms were strong in Jan-Feb. That looks too good to be true, and I'd expect new year distortions won't totally disappear until March. Still, one trend that looks real is the rise in chip exports, as China benefits from the same semi super cycle lifting the rest of the region.

The backdrop to the latest oil price surge is different to that of 2022. Then, wages were barely rising. This time, wage growth is at least 2%, and not slowing. With cycle momentum picking up too, there is more of a risk that a Middle East war (if it is short) further raises nominal momentum.

Deflation momentum continued to lessen in February, a trend that will now be given a further boost by global oil prices. But with this shift in the direction of deflation being driven by external factors, it isn't based on the sort of improvement in domestic growth that is needed for sustainability.

With activity and inflation in East Asia picking up before the war started, the extra push to prices from the conflict will be important for the near-term policy outlook if tensions subside quickly. Right now, the bigger risk seems to be a real supply shock that causes a demand shock too.

The CA surplus was strong in January, but while NPS outflows eased, retail buying of offshore equities remained high. Core inflation ticked up to 2.3% YoY, but that was related to holiday spending. The impact of the Middle East war will only start to be seen from March data.

The S&P/RatingDog PMIs suggest an economy that is finally recovering. The official PMIs, by contrast, indicate continued sluggishness. I am inclined to think there is no change, at least until the LNY impact fades. The one common theme is firmer input prices, even before an energy price shock.

The Q4 data showed corporate profits and capex remaining strong, but little change in firms' huge cash holdings. The labour share has bottomed, but isn't rising. Separate data show unemployment creeping up, which will become a bigger concern if the war with Iran causes a cycle problem.

The big theme in focus last week was current account surpluses, which across the region are both large and structural. There will be some downside risk if the latest problems in the Middle East cause oil prices to spike. Otherwise, the surpluses remain a fundamental reason for currency appreciation.

My framework for this year is an easing of tariff and price shocks that give a boost to domestic activity. Today's February data for Tokyo show the fall in headline inflation in January is persisting. Retail sales in January did jump, but these data can be noisy. IP is trending up, but slowly.