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The China Diviner
We introduce a model for the PBC's reaction function. It suggests that further policy loosening remain likely, in the form of either rate or RRR cuts.
Paul Cavey
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Korea – neutral labour market
The January labour market release is probably neutral for the BOK. Employment fell, but only mildly, while the unemployment rate improved, but because of a fall in the participation rate.
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Taiwan – weak in January
The manufacturing PMI was very weak in January, showing that the industrial sector remains deep in recession. The best that can be said is that the data are so bad that they probably can't get much worse. CPI was stronger in January, but that likely reflects New Year holiday distortions.
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China – no stimulus
January credit data suggest limited monetary stimulus, and no turnaround in real estate. To be bullish, you need to argue that infrastructure/capex can offset exports/real estate, or that January data are still backward-looking.
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Japan – headline halving
Import inflation has now fallen from almost 50% YoY to under 20%, suggesting headline CPI inflation drops from 4% to under 2% in the coming months.
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China – mixed
Core CPI inflation accelerated in January. But it is too early to conclude that economic recovery is driving higher prices. Before covid, hospitality prices tended to tick up during the LNY holiday. And PPI, which should also be strengthening if the economy is getting better, weakened in January.
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Japan – picking up
The Economy Watchers survey has been volatile since 2019, so caution is warranted. But the survey was firm in January, led by non-manufacturing. That's important when post-pandemic normalisation of Asian travel has the potential to boost hospitality, driving the unemployment rate below 2019 lows.
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Taiwan – no let up
Exports fell again in January, led by another big fall in shipments to China. That could reflect Lunar New Year distortions. Leading indicators suggest the trough for the overall export cycle should now be close.
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The China Diviner
Much market discussion focuses on consumption-driven recovery. Spending will rise in 2023, but only because it was so depressed in 2022. Policy isn't yet in place to make the recovery sustainable. In any case, GDP can't grow without property also expanding. That seems likely, but isn't yet assured.
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Japan – still gradual
Wages and consumption are trending up, but progress in incremental. Earnings grew more strongly in December 2022 than in any month since 1997. That is welcome, but is mainly the result of bonuses. Separate consumption data weakened in December, but that is probably payback after a strong Q3.
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The China Diviner
An opinion piece recently published in the SCMP.
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Taiwan – tentative turn
As with Korea, there are some tentative signs of a tun in Taiwan's industrial cycle, with export orders ticking up in December, and equities rising. But inventories in IT remain high, and the PMI in January was very soft. There's little sign of a real lift yet.
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Korea – not much change
There wasn't much change in either exports or CPI in January. At -14.6% YoY, the change in exports was the weakest in the current cycle. Headline CPI ticked up, but that was because of an expected change in utility prices. Core and personal services inflation fell, though only slightly.
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Japan – slow grind
The two big hopes for Japan's economy in 1H23 are a decline in inflation that lifts domestic spending, and a normalisation of Asian travel that boosts tourism. December unemployment and January consumer confidence suggest both dynamics might be in play, but not yet powerfully.
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China – strong headline, weaker details
The PMIs improved in January, and our FCI indicates a further rise to 52 from here. That said, the details today weren't particularly strong. They can be regarded as backward-looking, but we continue to think that policy hasn't moved enough to ensure recovery continues beyond the next few months.
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Last week, next week
This is what happened on East Asia Econ this week. Thematic The East Asia Economist: modelling the reaction function of Taiwan's CBC A couple of weeks ago, we outlined a policy reaction function for the BOK. Today we do the same for Taiwan's central bank, the CBC. Perhaps because Taiwan has never really experienced any inflation, we couldn't find a way in which CBC
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The East Asia Economist
A couple of weeks ago, we outlined a policy reaction function for the Korean central bank. Today we do the same for the Taiwan. The model strongly suggests that the tightening cycle is over, but isn't yet indicating that loosening is about to begin.
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Japan – inflation up again
Tokyo CPI rose again in January, and on a headline basis is now above 4%. Leading indicators continue to suggest the peak should be close, with this week's services PPI for December falling.
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Korea – still weakening
Business sentiment continues to fall, taking the BOK into what would usually be loosening territory. However, there is now some risk of second derivative improvement, with exporter sentiment and the diffusion both ticking up through February.
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Korea – inflation expectations up
Inflation expectations ticked up in January. That probably reflects a stabilisation of headline CPI on the back of higher utility prices. It would be more significant if improving market sentiment towards the global cycle starts to show up in a real strengthening of Korean industrial data.
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Region - a floor in Q1?
Exports across the region fell by -7% on average in December. By the end of Q1, the rate of contraction is likely to double, led by bigger falls in shipments to the US and EU. Beyond that, there are tentative signs of a floor, as DM sentiment surveys bounce, and China emerges after covid.
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The East Asia Economist
With US rates peaking and Asia finally opening up after covid, Japan's economy looks better placed for recovery. If the BOJ tightens now, it risks a policy mistake. Otherwise, the indicators to be watching are the shunto, and recovery of the hospitality industry as Asian travel finally normalises.
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Korea – less worse
Exports remain weak, and should deteriorate further in Q1. However, shipments in January weren't as bad as they might have been, and with our regional leading indicator showing early signs of bottoming out, there is now a risk of second-derivative improvement in Korean exports through Q2.
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Japan – not much change
Inflation trends aren't changing much. Current inflation through December was high, but leading indicators point to a clear peak. Regardless, policy uncertainty will remain high at lest until the PM picks a new governor for the central bank, an annoucement that is likely in the next few weeks.
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Korea – careful what you wish for
Korea's property market is reversing sharply. That turn will help control CPI inflation, but also increases the downside risks to growth. That in turn makes BOK rate cuts more likely.