Headline inflation is receding fast, but core inflation in Taiwan remains elevated, consistent with the low rate of unemployment. That will become important for the CBC if there is now any upturn in export growth.
The BOJ Tankan suggests continued modest growth and easing inflation. There are reasons to think the risks around this outlook are to the upside. But until those risks become reality, and in particular that the labour market tightens, the BOJ likely won't be in a rush to move policy.
The surge in the official PMI in June is at odds with other manufacturing indicators. But it is in line with the message being sent by the equity market, and recovery is worth keeping on the table as a scenario when unemployment is low and non-manufacturing sentiment continues to rise.
Headline inflation dropped in June, but there was also a first significant easing in core. That justifies the BOK being on hold, with the direction from here being dependent on external demand: does that now rebound on the back of AI demand for tech, or is DM about to take a dive into recession?
The key issue for macro in the region is whether exports are about to lift in the way equity markets are suggesting. Korean semiconductor exports did bounce in June. But manufacturing sentiment surveys in the region in June weren't strong, and early indicators for DM demand have weakened.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Two sets of data were released today. The Tokyo CPI statistics for June were mixed. More important for us were the national May labour market numbers, which continued to go sideways, and don't look strong enough to us to persuade the BOJ that this time really is different.
Orders-inventories did rise in the PMI today. But that is the one positive indicator. In most other ways, the PMIs were weak. Yesterday's Q2 surveys from the PBC also showed a fall in loan demand and continued weak price expectations. There's not much to suggest a turnaround in the cycle.
Retail sales were strong in May, but consumer confidence ticked down in June. This fallback wasn't big enough to be worrying, but is perhaps important when other indicators – namely the labour market – don't yet feel strong enough for the BOJ to be changing policy.
Business sentiment is going sideways. The weakest sector remains exporters, which suggests companies aren't seeing the recovery in external demand indicated by the equity market. The survey also gives the first hint that the goods price disinflation that began in early 2022 is coming to an end.
Consumption momentum in Taiwan remains decent, unemployment has fallen to a new multi-decade low, and there are now signs of a turn in the industrial cycle. It is starting to look more interesting for the CBC in 2H23.
In June the consumer confidence rose again; property price expectations picked up; and CPI expectations didn't fall. This probably isn't enough on its own to turn the BOK more hawkish. But if it is combined with better business sentiment and exports, then the bank will likely be back to hiking.
A slide pack on demographic dynamics, in particular addressing why the Japan experience doesn't tell us much about how changes in population structures will impact economies elsewhere.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Our latest slide pack summarising cyclical developments.
The flash PMIs softened in June. Headline inflation eased back in May, while measures of core continued to increase. The fall in headline is consistent with the BOJ's base case. The central bank likely won't expect core to remain elevated unless the labour market tightens.
Our base case would be exports flat-line the next 3M. But we can't ignore the upside risk being suggested by equities. That will become more meaningful for the outlook if it starts to show up in regional business sentiment, with the next check on that being the Korean confidence data next week.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
A short video of this week's regional themes
Everything in the Japan macro story has fallen into place, except the labour market. Unemployment is going sideways, and wage growth hasn't picked up. We expect this is a soft patch, and as it clears, the BOJ will have more confidence to change YCC. July, probably, is too soon for that.
It was no surprise that the CBC kept rates on hold at its Q2 meeting today. The risk from here is that activity re-accelerates in line with the equity market, which would likely mean the bank's latest GDP downgrades are the last, and the bank in 2H isn't feeling so relaxed about inflation.
Today's data wasn't all bad, but the overall message is that economic momentum remains weak. With aggregate demand not strong enough to lift prices, deflation is worsening China's debt dynamics. In response, policy is once again loosening, but we think a real turnaround isn't likely yet.
Employment rose and the unemployment rate fell to a new multiyear low of 2.5% in May. These aren't the sort of developments that will make the BOK fell more confident that the stickiness of core inflation is about to give way.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Regional data show three themes: 1) Differentiation: Japan strongest, Taiwan weakest; 3) Diversification in export markets: autos and DM holding up while tech and China remain weak; and 3) Desynchronisation: despite the weakness in exports and industry, services and retail sales are holding up.