East Asia Econ

A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.

In June, headline fell, BOJ core rose, and international core was flat at 1.6%. So, not a clear message...and then there's the uncertainty about tariffs and politics. Some tariff deal – like a TRQ – I think gets the BOJ engaged again. But I don't expect much dovishness without a US recession.

The Q1 tick-up in overall export volumes has ended, but hasn't reversed. That's partly because of the willingness of the auto firms to cut USD prices. However, prices fell less quickly in June than May, and reports suggest the car firms are now starting to raise prices.

While there's been jitters around tariffs and inflation, business sentiment overall continues to hold up remarkably well, as shown by today's Reuters Tankan. For mfg, weakness in autos is being offset by an improvement in tech. That theme is visible in equities, but not yet in actual export data.

My latest video, discussing the JPY outlook in the context of this year's two shocks: tariffs, obviously, but also the rebound in inflation that caused a new sharp fall in consumer confidence. The risk from US policy is still growing, but, importantly, the rebound in prices is losing momentum.

The drop in sentiment in today's BOJ consumer survey is somewhat backward-looking; more recent consumer surveys point to some improvement as rice prices fall. The tone of Friday's broader regional report from the BOJ was also positive, but with one big caveat: clear anecdotal concern about tariffs.

Data today show more feed through into PPI from the easing of import prices. Weekly rice prices have also dropped again. These trends lower goods price inflation, but will boost household spending power. At the same time, the sharp fall in auto export prices shows the negative impact of tariffs.

Nominal wage growth remains firm, but real wages to continue to fall. That in turn is weighing on consumption, which other data today show remained sluggish in May. The cycle in 2H will likely depend on goods prices, because that will determine the strength of real wage growth and consumer spending.

The renewed tariff threat is a dominating issue for Japan. Yesterday's debate among leaders of the political parties didn't reveal any new strategy to head off the risk. But today's services PMI was firm, and in an interesting speech, board member Takata continued to sound cautiously constructive.

In terms of inflation, the details of the Tankan were stronger than yesterday's headlines. Output prices – a good lead for underlying CPI – rose to another new post-1980 high. However, President Trump, as had seemed likely, is now threatening Japan with yet higher tariffs.