The cycle isn't bad enough from Beijing's point of view to shift policy. With growth strengthening, it is reasonable to expect 25bp hikes/quarter in Japan. The BOK's dot plot looks light against nominal growth of near 30%. The CBC on hold is light when real rates across the curve are negative.
Consensus was right, and the CBC didn't change rates today. The vote wasn't unanimous, with two members voting for a hike. However, some of the property measures were loosened. To me, this suggests that policy is too loose, and thus that the gradual warming up of inflation will continue.
Q2 flow of funds: 1) firms remain net savers; 2) the fiscal deficit is under 2% of GDP, and government assets continue to rise; 3) GPIF, foreigners and households are absorbing JGB supply as the BOJ steps back; 4) household equity holdings are up sharply, but mainly because of valuations.
I expect the CBC to hike. That was also my view 3M ago, and then I was wrong, and the strong consensus is that I'll be wrong now too. Underlying my view is that the CBC can't be confident inflation has peaked. Instead, with real rates negative and the TWD weak, price pressures are likely to persist.
Japan is now seeing the first real upswing in both manufacturing and non-manufacturing since 2017-18. Rising CPI and the JPY aren't the only factors pushing the BOJ towards hikes.
Domestic demand remains soft, with no break in the property market collapse. But helped by exports, IP is growing near 6% saar, which keeps the GDP growth target for this year in reach. So I doubt much changes in terms of policy, but the emerging weakness in services is something to be monitoring.
Last week's GDP data showed nominal growth of over 25% YoY in Q2. Most of that was in the form of corporate profits, but employee compensation still rose 8% YoY. With the government planning growth in fiscal spending of 12% in 2027, there are more signs of the IT sector lifting the broader economy.
I am away the next few days, so this week's summary focuses on what appeared on the site in the last week. I am back on Monday 14th September.
Today's BOP data show that after selling more than USD30bn of domestic equities in June, foreigners purchased USD6bn in July. That swing goes a long way to explain the sudden appreciation of the KRW. That should be able to continue, given CA surplus of over 20% of GDP, strong economy, and BOK hikes.
50 slides covering regional themes, and dynamics in the individual economies.
I thought the underlying data in today's CPI release were firm. Despite an easing in travel expenses, core inflation (excluding mobile phone bills) remained at 2.8% YoY, the trimmed mean rose, and the diffusion across all items ticked up.
A step-by-step guide to understanding Japan's fiscal position. By using this, you will have a better idea of how to make the assumptions needed for each component of the standard gross debt equation, which can then be plugged into our online model.
The PMIs show Japan's manufacturing cycle is the strongest in the region. That might be because the measures in Taiwan and Korea struggle to capture the macro impact of chip strength. Even so, it is still an important take-away, especially when the PMIs show Japan also leads in price strength.
Defying BOJ fears of a slowdown, this year's surge in corporate profits continued in Q2. The big driver this year has been manufacturing, and today's PMI shows the recovery in the sector isn't over yet. Relative to the strength of profits, capex and wages are sluggish.
Output in July retained the gains of June, and capex spending rose further. Both suggest a strong start for GDP in Q3. Retail sales were weaker last month, but the household sector should start to benefit as the government spends the 20% growth in tax revenue of recent months.
The PMIs continue to show no economic cycle. Construction activity continues to drop, but the manufacturing PMI continues to hover around the 50 mark. Input prices have rebounded again, so this year's recovery in PPI isn't ending just yet. None of these changes point to a shift in policy.
The market themes I think are about rates v currencies. Ranking by moves in rates, the order is Korea, Japan, Taiwan then China. In currencies, by contrast, it is Korea, China, Taiwan, then Japan. That raises some interesting discrepancies.
The highlights today were deputy governor Himino's speech in Japan, and the BOK meeting in Korea. Tech profits in China remain strong, but aren't lifting overall earnings. Consumer confidence in Taiwan weakened in July, while the official Monitoring Index continues to point to an economic boom.
Today's BOK meeting didn't throw up any big surprises: core CPI and growth forecasts were raised against the backdrop of the TOT shock, and the bank hiked again with the aim of being "pre-emptive". However, Governor Shin's remarks at the press conference produced a lot to digest.
Deputy governor Himino's argued today that all the main macro dynamics are pushing up prices, underlying inflation has been rising, and so there is now a risk of "underlying inflation exceeding 2%". Unsurprisingly, he didn't spell out the policy implications, but it does sound quite hawkish, no?
Back-to-back rate hikes aren't common, and since July, stronger KRW and lower equities have tightened FCI. However, the economic backdrop is unusually strong, so I would still expect the BOK to hike at its August meeting. That said, rather than rates, it is the KRW that looks more interesting here.
I am still totally convinced that cycle dynamics today are that different from 6M ago. But that property still hasn't found a floor is a concern, and it would now be less of a surprise if monetary easing starts again. For me, the interesting question is whether that has implications for the CNY.
Retail sales have been anchored around zero for more than a year, property activity is still dropping and FAI is contracting. Nonetheless, IP is growing around 5%, partly because of exports, and the government's attitude suggests that it continues to think that is enough.
China macro isn't weak enough to trigger a change in policy direction. The JPY is weak enough to speed up BOJ tightening and puts pressure on Takaichi to change fiscal rhetoric. KRW is starting to look more interesting than rates, while in Taiwan, domestic demand puts the focus on rates.
Headline growth rates are slowing, but the government's qualitative assessment remains bullish, there are more signs of life in domestic demand and services, and while a 2026 inflation forecast of a bit over 2% isn't so high, it has been raised four quarters in a row, and is above the policy rate.
