We are getting near a test of our thesis that PPI deflation in China is mainly cyclical, with global commodity prices suggesting a PPI recovery.
As in China, consumption has been the big macro drag in Japan. That should change in 2024, but BOJ data through February show no turnaround yet.
With a weak cycle, policy is being loosened. But given China's obvious industrial strengths, it is still striking how much the CNY has weakened.
Japan's negative output gap has finally closed! But that has taken 14 quarters, and even now, the BOJ calculates the positive output gap is just 0.02%.
At 52.7 in March, the S&P Global services PMI for China is firm, above the post-2012 series average. The write-up feels better still, reporting firms being "enthused".
Quick Take chart. Japan's services PMI shows re-acceleration, with firms reporting a "sustained rise" in jobs and inflationary pressures remaining 'marked'
Quick Take Chart. PBC lending to the financial sector via the PSL facility fell in March. The decline was small, and might be temporary. But at the least, the PBC isn't doubling down.
The details of the Tankan survey reinforce the message of the headlines: the labour market is tightening further, and price pressures are rebounding.
Quick Take Chart. Details of the BOJ's Tankan don't show a lessening of inflation. Rather, price pressures are warming up in non-manufacturing, and re-accelerating in manufacturing.
Lower energy subsidies will push up headline inflation in Japan in the coming months. More interesting is that output prices in the BOJ's Tankan survey point to underlying inflation also heading higher.
Headline inflation ticked up in March, but our measures of underlying inflation have now closed in on 2%. The central bank will be able to give more attention to the weakness of the domestic economy.
Headline inflation ticked up in March, but underlying measures slowed. Prices are still rising by over the BOK's 2% target, but the trend slowdown will allow the central bank to give more attention to the weak economy.
The PMIs show no change in the trends: manufacturing is weak, while non-manufacturing is relatively strong. But equally, it remains likely that there will be a transition to manufacturing-led growth during the remainder of 2024.
Taiwan's mfg PMI improved in March, but remained below 50. That means mfg in a mfg-led economy has now been contracting for almost two years, and yet unemployment is at 20-year lows, and core inflation at 20-year highs.
There has been a recovery in Korean manufacturing activity, but it remains sluggish, with export growth stalling at around 10% YoY, and the PMI dipping back below 50 in March.
The headlines from the Tankan look pretty positive for the BOJ, with sentiment solid, the labour market tightening further, output prices easing only slightly, and capex plans holding up.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Our view has been that China's cycle has bottomed, and that market sentiment has been too pessimistic. The official PMIs for March support that idea, but the details aren't convincing enough to think the cycle has real momentum.
The upside risk for Japan and the Bank of Japan is a fall in headline wages and a long-awaited recovery in consumption that lifts aggregate demand. There are some signs of that process falling into place, but they remain tentative.
Business sentiment in Korea still isn't recovering. Exporter confidence has lifted, but continues to be offset by weakness among domestic firms. Price expectations in the consumer survey yesterday were probably still too high for the BOK's liking, but the probability of a BOK rate cut is growing
Consumer confidence remains around the historical average, which is not strong enough to remove BOJ concern about the sluggishness of the domestic economy. However, the March survey doesn't give the bank the all-clear to act, with price expectations picking up for the second consecutive month.
China's rising competitiveness in more capital-intensive manufacturing sectors is an important theme that we still buy into. However, relative to this belief, and the current global concern about China's EV export peril, recent export performance has been a little underwhelming.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Former BOJ governor Shirakawa continues to argue Japan's problems are about demographics, not deflation. His thesis is worth studying, even if it is not shared by the current leadership in the bank.
We aren't convinced that falling PPI shows China is stuck in a deflationary trap. China's PPI cycle isn't out of whack with global trends, and unlike Japan in the 1990s, monetary policy isn't reinforcing the drop. There's potential for nominal growth to look better this year.