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I can't claim to have expected the 10% surge in the TWD in the last couple of days. But I have been arguing for a while that the risks of a structural appreciation of the currency were real and rising. This is a brief presentation from March that highlights the issues.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The tariff threat has clearly changed the BOJ's growth outlook. That has implications for inflation. However, in today's detailed outlook, the bank reiterated confidence in wage-price dynamics. While it feels even less urgency than before, the bank isn't yet calling the end of this rate hike cycle.
Yesterday's export data for April were sluggish, and today's PMI fell to 47.5, the lowest since September 2022. Ongoing political uncertainty won't help a recovery. The BOK expects this weakness to reduce inflation, but that feed through isn't obvious yet, with April core CPI remaining over 2%.
GDP growth in Q125 reached almost 10% saar. That is all about exports, and so is vulnerable to tariffs. But it also furthers the step-change in growth evident since 2020. Before then, Taiwan was growing at a similar pace to Korea. Now, the two economies couldn't look more different.
Export orders fell sharply in April, but the PMIs overall weren't so bad. One reason is a bottoming of the construction cycle. That, however, isn't improving, and with prices and the business outlook falling again, the economy still isn't on a stable footing to get through the tariff shock.
Like most other observers, I think it unlikely that the BOJ changes policy this week. But given domestic price developments, there isn't much room for dovishness. And if the US really wants to tackle global imbalances, it has an interest in creating the conditions that allow the BOJ to hike further.
Profits did rise YoY in March, but because of the base effect. Relative to GDP, earnings remain sluggish. Unsurprisingly, given the collapse of real estate, heavy industry is weakest. But in manufacturing, aggregate earnings aren't strong either, and around one-third of all firms are losing money.
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A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Tokyo CPI in April was boosted by changes in official subsidies. But inflation remains broad-based. Food prices were up, and rental inflation jumped – important, given the near 25% weighting. Services inflation didn't shift much, but the trend will be clearer with April national CPI and SPPI.
Business sentiment fell again in today's survey, and has now only been worse during the global financial crisis and covid. Exporter sentiment has ticked-down, but the weakness is much more apparent in domestic, non-manufacturing sectors. Further policy easing is ahead.
Taiwan macro doesn't attract much attention, but its experience matters. Taiwan was most exposed to the 2000s China shock. That it then suffered near-deflation reflected tight fiscal policy, a lesson that needs to be learnt in dealing with the latest shock, this time emanating from the US.
Export volumes have ticked up this year, but not by enough to think that JPY weakness is finally boosting sales. That has a silver lining: just as JPY weakness didn't boost real growth, a strengthening currency won't lead to much deterioration. There will, however, be an impact on nominal earnings.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Today's CPI release was less interesting than data released earlier in the week showing a jump in part-time wage growth in March, and comments from MPB member Nakagawa highlighting upside risks to inflation.
"It's like we're suddenly in a dark tunnel because of the change in the tariff policy of the US, so in this dark situation, it's better to adjust the speed a little bit and wait until it gets a little brighter".
Since June last year, there has been a real inflection in retail sales and some construction indicators. In Q1, however, real estate remained as weak as ever. Manufacturing FAI is strong, but that has to be at risk from the trade war. Overall, the economy still isn't on a firm footing.
The second of two videos on consumption, an issue that is even more important given the economic damage that will be inflicted on China by the tariffs. It is impossible to imagine Beijing supporting western-style consumerism. But there is still a way for economic policy to boost consumer spending.
The economic environment for Korea is about as bad as it can get. Despite the short-term rebound in house prices, that suggests more rate cuts, starting at this week's meeting, that will ultimately take the policy rate below neutral. The one caveat I have is the stickiness of services inflation.
Exports through March were solid, but not so strong as to suggest big front-loading. The real standout is the import ratio dropping to a new post-1990s low. The trade surplus upsets Trump. Equally though, weak imports limit China's appeal as a market for others looking for an alternative to the US.
Credit and monetary data continue to suggest the monetary squeeze of 2023 and 1H24 has ended. The significance of the rebound is offset by three factors: it isn't incorporating non-government borrowing; mortgage lending isn't rising; and definitional changes to M1.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The gap between PPI and import prices shows pent-up inflationary pressure, a dynamic that is also showing up in a renewed rise in consumer inflation expectations. These trends probably have further to run, unless there is a global recession or JPY appreciation that causes import prices to fall.
The rise in core from Q424 sustained in Q125. But that isn't enough to suggest a turnaround in the GDP deflator, and Trump's tariffs mean that downside risks to inflation have grown again. Policy rates are likely to be cut, but that won't be enough to offset this latest shock.