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China – softer inflation
CPI and PPI inflation were soft in February. There will be Lunar New Year distortions, but still, the date don't support the idea of strong economic recovery.
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Japan - wage growth slows
Wage growth in Japan slowed in January, as the benefit of year-end bonuses disappeared. Underlying wage growth is running a bit over 1% YoY, stronger than history, but not enough to produce CPI inflation of 2%. In this sense, the BOJ doesn't have much room to shift policy.
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Korea – lower inflation
Inflation eased in February, and probably a bit more quickly than the BOK was expecting. However, the details weren't so weak, with sequential core and private services inflation remaining elevated. Our model for the BOK suggests tightening pressure, while lessening a bit, remains high.
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Taiwan – big upturn
The Taiwan February PMI surged to the highest since June 2022. But this was partly because the whole of the Lunar New Year holiday fell in January, meaning there were more working days in February 2023 than any since the survey started. That has relevance for thinking about China's PMI too.
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The East Asia Economist
Headline CPI is likely to decline. But a sharp drop to 2% seems unlikely. Cyclically, the percentage of items rising in the basket rose to a new high in January. Structurally, wage growth suggests Korea still isn't entering a demographically driven deflation.
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Japan – taking stock
Inflation is finally falling, and the labour market is tightening. But the easing of inflation is because of government subsidies, and employment is still below pre-pandemic levels. So, the recovery is gradual and vulnerable to shocks, with the obvious one being another sharp move higher in $JPY.
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China – better headline PMIs
The headline manufacturing PMI data were strong at around 52, which is roughly in line with our FCI. But the details were underwhelming, and leaves us still thinking that the recovery needs more effective policy support to be sustained.
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Korea – export floor?
Korean exports continue to fall, but there are sighs that a short-term floor might be near. The driver of that is recovery in China, which is happening when exports to DM have yet to decline.
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Taiwan - taking stock
The case for a shift away from tightening is clearest in Taiwan, where the cycle is weak and inflation modest. Our model already points to a big fall in the likelihood of further tightening. It isn't yet suggesting, though, that loosening is on the table.
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Japan - inflation up again
CPI inflation rose again in January. That's probably the peak, with utility subsidies kicking in from February, and import prices easing. Still, it is no longer reasonable to argue that inflation isn't broad-based, even if it hasn't yet become fully domestically generated.
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The China Diviner
A popular chart for China plots metals prices against the credit impulse. But we'd argue that even in China, it is useful to look at the price of money not just the quantity, with interest rates leading credit. The relationship has weakened since 2020, but that tells us about what ails the cycle.
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Korea – back to hawkish
As expected, the BOK didn't hike rates today, but sounded hawkish. The economy is weak enough to end tightening. But inflation remains high, and the market will likely struggle to get conviction on the direction of CPI much before the end of Q2.
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Korea – Taking Stock
The BOK meets tomorrow, and is caught between a clear fall in activity – seen again in today's business confidence data – and continued high inflation. After hiking at every meeting since April, there's reason to expect a pause, but it will be tough for the bank to sound doveish.
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Korea - inflation expectations up
Q4 household debt, exports for the first 20-days of February, and consumer confidence for the full month were all weak. The consumer confidence survey did though show a rise in inflation expectations.
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Taiwan - relatively strong wages
Earnings and hours worked suggest that although economic activity is contracting, wage growth is holding up, particularly in manufacturing. Wages should be getting support from the post-2020 surge in productivity, but the gap between productivity and wages has been large for years.
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Japan – taking stock
It now falls to Ueda Kazuo to try to diffuse pressure on YCC. But he also needs to find a way to nurture economic recovery from covid. This week's GDP data suggests again that this process still has a long way to go, and would risk being short-circuited by premature BOJ tightening.
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China – property a bit better
Property price inflation was a bit better in January. Historical experience suggests that given the low level of interest rates, a recovery is what should be happening. But low rates didn't prevent a property collapse in 2022, meaning there's now a lot of uncertainty about the outlook.
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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.
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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.