Recent data show investment fell in 2024 to under 40% for the first time since 2008. On the flip side, consumption edged up, helped by a stabilisation of the savings ratio and a rise in welfare spending. But none of these changes are happening fast enough to boost the cycle.
At a headline level, the industrial PMIs were better in June, but the details were weak, and there was no improvement in the services PMI. The rise in the credit impulse is taking away some of the downside risk for the cycle, but there aren't indications that the cycle is about to really improve.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
A review of the cycle, and three scenarios for the BOJ: 1) no more hikes; 2) hikes on the back of a firm nominal cycle, and 3) tightening because it is already too far behind the curve. My base case is 2, but the factors to watch are tariffs, the labour market, and the continued weakness of the JPY.
Profits fell 9% YoY in May, and are now close to 5% of GDP, a level that's only been breached twice in the last 15 years. The driver is more demand- than supply-side, in the sense that the upstream profits, hit by the property downturn, are weakest. But even in machinery, profits aren't rising.
I'm just starting to catch up with things, and one of the first things I've made sure to look through is yesterday's speech by BOJ Monetary Policy Board member Naoki Tamura. He doesn't represent the majority view, but his speeches are well worth reading, and this one was no exception.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Given regional history, China's transition to exporting more capital goods shouldn't be unexpected. More unusual is that 1) this transition hasn't been accompanied by slower overall export growth, and 2) has occurred at the same time as a sharp slowing of imports. Chart pack attached.
My latest video, discussing how Korea is managing to avoid the labour market decline that would usually be expected as the population ages. This is likely to dampen wages – and potentially inflation – in Korea relative to Taiwan, where the part rate isn't rising in the same way.
Today's quarterly business outlook survey shows more incremental weakness in business sentiment, led by manufacturing. That's another sign that tariffs in particular have taken the edge of the cycle. However, there's not yet signs of real deterioration, which capex firm and employment still tight.
Today's labour market data show unemployment low but private sector employment weak. Business confidence should improve after the election, but other data released today for trade in the first 10 days of June show overall exports remaining lacklustre, even as semi exports start to pick up again.
Overall trade trends – strong exports, weak imports, and a big trade surplus – remain in place. But the Trump tariffs are causing big shifts in the structure of exports. Direct shipments to the US have fallen 40% this year, and excluding the pandemic, haven't been this low since 2013.
CPI was surprisingly firm in May, with core continuing to show a reversal from the deflation of 2024. Overall, however, nominal indicators remain very weak. Leads for core have started to deteriorated again, and PPI deflation accelerated in May. The GDP deflator will be negative once again in Q2.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
With the bigger shunto rounds since 2023, wages have tended to jump early in the fiscal year. That was true this year, with full-time regular wages in April back to the faster post-2023 trend. However, part-time wages were flat, which will matter if confidence and the cycle don't rebound in 2H25.
The important detail in today's CPI release for May was the drop in MoM core. Given the weakness of demand – now beginning to show up more clearly in the labour market – that moderation should persist. With global commodity prices weighing on headline, inflation should be less of an issue in 2H25.
The tone of Ueda's speech today was rather constructive. Of course, he discussed the risks from tariffs, but didn't think they were likely to derail the economy. If some kind of Japan-US deal can be reached – and progress is reportedly being made – BOJ hikes will quickly be back on the table.
A shorter video that last time, summarising the most important issues for each economy, giving a regional ranking, and discussing market implications.
My model points to a rising risk of CBC tightening. But that reflects the export blow-out of 1H25, and neither markets nor officials expect that to persist. Moreover, there are the inklings of a structural rise in the TWD, which would mean tightening via the currency. Rates could actually be cut.
Operating profits reached another record high in Q1. Like the cycle overall, profits have been led by non-manufacturing, especially in terms of margins. That is partly due to cost-cutting, with the labour share dipping in Q1. Capex is rising, but not particularly fast, despite high cash holdings.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The manufacturing PMI did improve in May, lifted by a bounce in export orders. But there's no sign of a turnaround in the underlying economy, with the construction PMI weak, output prices softening, and business confidence remaining poor.
Tokyo data show May inflation remaining high. In other releases, unemployment is low and retail sales sluggish. Tokyo CPI dynamics are diverging from national trends, because of the stronger property market. But still, the message for the BOJ is the same: inflation is strong, but growth isn't.
The BOK cut rates again to 2.5% on the back of further downgrades to the outlook for growth. That forecast makes further cuts likely, though remarks today suggest a sharpening of the debater within the MPC about the need to boost growth versus the risk of rate cuts just pushing up asset prices.
Despite an improvement in consumer confidence, all-economy sentiment remained weak in May, dragged down by poor confidence in the corporate sector. However, inflation indicators are falling too. Everyone – it seems – expects the BOK to cut tomorrow, and that likely won't be the last in the cycle.
