It is clear that the market moves that accompanied the BOJ's July policy changes are impacting prices. But it isn't obvious that they have derailed the underlying path for the economy. It seems to us the door remains open for an October hike, with the obvious risk being events in the US.
The shift in $JPY is clearly having an impact, with JPY import price inflation dropping from July's +10.8% YoY to just 2.6% in August. But BOJ officials suggest they remain confident in the underlying outlook, which isn't unreasonable given the resilience of survey data such as today's BSI.
A critical part of the BOJ's positive narrative is the labour market tightness shown by the Tankan. That survey will be released next in early October, but early signs are positive, with today's BSI survey from the MOF, also quarterly, showing tightening over all three of its measurement periods.
Data today show exports still growing, and UE still low. The BOK hasn't been ignoring exports, but the bank has been more focused on weak domestic demand. The labour market data don't suggest that weakness is disappearing, with strength in employment concentrated in state and part-time positions.
Just looking at the headline labour market data, and it would be difficult to know that the BOK is moving steadily towards a rate cut. Data released today show that in August, the unemployment rate fell to a new multi-decade low of just 2.4%!
TSMC's sales were softer in August (especially after adjusting for seasonality), and with sentiment towards the sector starting to weaken, it seems possible that the best of the cycle is now in the past. That will limit further improvement in Taiwan's overall exports.
It seems increasingly unlikely that exports can offset the weakness of domestic demand. Today's export data for August weren't strong. Volumes might be better, but the regional export cycle is likely peaking, and that at a time when China's domestic demand seems to be weakening further.
While exports jumped in August, with signs that the semi upswing is losing steam, it still seems likely that the export peak is near. Pretty much all the growth is coming from the US, which is propelling a surge in the bilateral trade surplus. That makes Taiwan vulnerable if Trump wins re-election.
The Economy Watchers survey improved in August. That matters, as if the market vol around the BOJ meeting in July had caused damage to the cycle, it should be showing up by now. The rise in the household score is particularly important, given the previous weakness of consumption.
MoM core CPI fell again in August, and while perhaps a bit too early to pronounce that China is definitively in core deflation, it is getting close. PPI deflation also worsened, and the leads suggest that will continue. Despite stronger food prices, it is likely interest rates continue to fall.
Last week I gave a short conference presentation updating the framework I've been using to think about China today versus Japan in the 1990s. The slides focus on deflation, manufacturing, currencies, and household consumption.
In today's second release, Q2 GDP growth was revised down, from 3.1% QoQ annualised to 2.9%. The driver was weaker capex, which, like consumption, has yet to rise back above pre-covid levels.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The recovery in Q2 GDP was driven by consumption, and the BOJ's monthly proxy for PCE suggests growth has continued into Q3. Today's data show consumption grew in both June and July, the first two consecutive months of growth in almost a year.
It can be seen in the PMI and 10-D upstream prices: the mild firming of PPI of 1H24 is now rolling over. It is also evident in global commodity prices, so this isn't a China-specific phenomenon. But when inflation is already so low, it matters more for macro in China. Click to see the other charts.
There's probably some noise in today's data showing a big fall in August, but the general decline in core inflation in the last few months will be allowing the CBC, like the BOK, to become more relaxed about the outlook for prices.
Rather than thinking a weaker USD will be a catalyst for a stronger Chinese cycle, we worry more that a stronger CNY means even more downside risk, being another reason to conclude that the muddle through of the last 18M is running out of road.
Our most out-of-consensus view is that Fed cuts are likely bad news for China's cycle. For Japan, we think the market needs to price in a bigger likelihood of another BOJ hike. The CBC in Taiwan likely stays on hold in the next few months, while the BOK looks set to cut soon.
At a headline level, wages were firm in August, with the details, if anything, a bit stronger still. In particular, full-timer pay in the constant sample data rose 3% YoY, and part-time hourly wages rose 4% YoY. The wage-price cycle that was the basis for the July rate hike still looks on track.
There's a lot of concern about weak profits in China. In Japan, profitability by contrast continues to get stronger, boosted in Q2 by sales and a further rise in margins. After a sharp fall in 2023, the labour share has stabilised, but with capex modest, cash holdings remain large.
Inflation is now at the BOK's 2% target for the first time in 3 years. The BOK has been comfortable about inflation for a while already, but still, the latest drop will make it more difficult for the bank to further delay rate cuts. The wild card is if housing doesn't slow with the latest DSR rules.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The PMI for mfg fell further in August, and while for non-mfg it ticked up, the details across the surveys were soft. The drops in input prices and jobs were particularly noticeable. Maybe the Caixin PMI sends a different message, but today's data show a cycle that is starting to deteriorate again.
The BOJ's Himino emphasised this week that the policy path isn't set in stone. But the bank does seem to have quite a strong view on the path the economy is taking. This week's inflation data were consistent with that, but labour market data were a bit softer, and there's no consumer pick-up yet.
That consumer confidence has bounced while inflation expectations stay high is constructive, suggesting price hikes don't immediately impinge on sentiment in the way they used to. However, the recovery in consumer confidence remains modest: outside of crises, it has rarely been lower than August.