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
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.
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.
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.
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.
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.
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.
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.
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.
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.
Taiwan's GDP contracted in Q4. The labour market was stable at a headline level in December, but employment in manufacturing did fall. We continue to think Taiwan will be the first to cut, with the risk being any lift that results from China's re-opening.
If there was a surprise with the Q4 data, it was that the official measure of GDP managed to grow. The details were weak, with only household savings rising strongly. Those savings provide a platform for a rebound in 2023, though not if households think their income growth has permanently slowed.
Import price inflation eased in December, suggesting CPI inflation falls below 2% YoY in 1H23. On this basis, the BOJ shouldn't be tightening. But having opened the door to change in December, the bank faces an enormous task if it wants to convince the market that rates aren't moving further.
Official December data point to property prices bottoming out. That isn't unexpected, given the ending of zero covid and other signs that property prices have picked up. Cuts in mortgage rates suggest there could be quite a big bounce in prices, but that needs household confidence to recover.
After a big fall in November, the trade data were less eventful in December, in MoM terms hardly changing at all. That means YoY growth is still deteriorating, and leading indicators point to that continuing through at least Q1.
The BOK hiked again today, but the meeting gave strong hints that this is the last in the current cycle. The probability of a cut will likely start to grow in Q1, though for the BOK to actually do that, the bank will need more confidence that inflation is going to decline.
The EW survey of corporates and households continues to suggest modest recovery. It can be hoped that household sentiment improves from here as inflation comes down. That will be helped by the stronger JPY, though data released yesterday confirm very large JGB purchasing by the BOJ in December.
Inflation ticked up in December, and it is fairly easy to predict that China's deflationary scare is over. It is more difficult yet to say what sort of inflation comes in its place. The ending of zero covid means higher inflation, but also erodes the usefulness of the usual leading indicators.
There's volatility from month-to-month, but the BOJ's measures show that broadly, the acceleration in consumption growth seen since late 2021 is holding. That's even though the BOJ's consumer confidence survey shows a high level of pessimism, with particular dissatisfaction about prices.
Unemployment rose and employment fell in December. This deterioration in the labour market is part and parcel of the BOK's attempts to control inflation, and weaker data for one month won't start the bank loosening. But the December data do make further hikes less likely.
Credit and monetary data remain soft. In itself this isn't vital for markets, which can think the ending of zero covid matters more than anything else. But monetary data, particularly the willingness of households to embrace financial risk, will affect the sustainability of any upturn.
Tokyo CPI accelerated again in December, with further evidence of a broadening in price pressures away from just imports and goods. Underlying services inflation looks to be running at around 3.5% YoY, and with the economy continuing to open up after covid, a further increase is likely from here.
Our model suggests the BOK doesn't hike this week, and the inputs point to the bank being pulled into loosening territory during the year. The risks are that domestic factors, rather than exports and the industrial cycle, prove to be bigger drivers of inflation than they have been in the past.
This is what happened on East Asia Econ this week. Thematic The China Diviner: style over substance Policy statements have generated optimism of a shift in Beijing's economic strategy. But the language being used isn't so unusual, while the challenges the economy faces are. We still think changes in substance, as well as style, are needed, in particular material support for the household sector. Cycle China