East Asia Econ

Data releases the last couple of days give more evidence that tariffs haven't derailed exports or capex. Even so, the flow of funds for Q3 show corporates remain net savers. With the fiscal deficit now also now narrowing to the lowest level since the 1990s, the result is a growing CA surplus.

The BOJ has been concerned that tariffs would reduce profits, cutting into wages and capex. The Tankan shows no evidence of that: profit and investment expectations remain firm, as do inflation expectations, with the backdrop being a labour market that is tight for all industries.

In Q4 business sentiment improved, the labour market tightened, price pressures picked up, and capex intentions stayed elevated. The BOJ is set to hike on Friday. Today's survey, like other recent data, raise the risk that the bank can also send a clearer message about the outlook for rates in 2026.

My latest video, discussing the BOJ and the outlook for the JPY.

The post-August rise in PPI continued in November, with one driver being the JPY-driven rebound in import prices. All told, upstream price pressures remain firm, and suggest that CPI isn't likely to ease much over the next 6M.

The supplementary budget looks big, but this year's fiscal deficit is still budgeted to narrow. Gross debt is high, but the government's net liabilities have fallen. Interest rates have risen, but before Takaichi took office, net annual interest payments by the government had fallen to near zero.

A few releases today – October wages and CA, November Economy Watchers survey, and Q3 revised GDP. The overall picture is mixed, though the acceleration in inflation and drop in real wages into early 2025 has now stabilised, and that is allowing an improvement in household sentiment.

The tone of governor Ueda's speech today suggests a rate hike is close. He claims that risks to the US are receding, identifies five recent positive wage developments, and with firms' price and wage behaviour changing, argues that exchange rate changes are more likely to affect prices.

Headline SPPI inflation was stable in October, but weak for high labour-intensive sectors, while part-time wages were strong, likely on the back of the minimum wage hike. That's an unclear picture. But right now, with the JPY so weak, the BOJ will focus more on headline CPI than these messy details.

The BOJ's base case has been that tariffs would slow inflation and growth. Today's data – November flash PMIs, and October trade and CPI data – give no indication that such slowdowns are occurring.

The gap between import prices and PPI in the October data illustrates the sort of pent-up inflationary pressure in Japan that is likely to be exposed if the JPY remains so weak. Today's data also show a decent rise in auto export prices, but to a level that is still 6% below the pre-tariff level.

The sharp recovery in sentiment in the EW survey continued in October. The improvement is broad-based, affecting both corporates and households. That shows a lessening of the tariff and inflation shocks of 1H25, and should be reflected in the BOJ becoming more optimistic about the outlook.

The summary of the October BOJ meeting show a stronger consensus that the time is approaching for another rate hike. That is partly because concern about tariffs is fading. It is less about domestic demand: data today show consumption trending up, but still only very slowly.

Wage growth was softer in September. The continued slowdown in part-time wages per hour will be a bigger concern if it persists beyond the October rise in the minimum wage. Per hour full-time wage growth is stronger than the headline, though the data are noisy.

Today there were the usual month-end data releases of retail sales, the labour market, and construction, as well as Tokyo October CPI. More interesting was the BOJ's full outlook report, analysing exports, capex resilience, food prices and consumption, as well as wages and prices.

The steady drop in services PPI inflation stabilised in September, with core ticking up to 2.9% YoY. The data aren't good enough to prove the decline is now over, but I do think a floor should be close. Lumpiness in the data suggests a short-term bounce, and the labour market remains tight.

National inflation data for September was messy again. One reason was public service prices falling, a development that stands out when a theme of recent BOJ speeches has been pent-up inflation pressure in the public sector. Overall, the inflation picture still looks solid.

BOJ board member Takata Hajime yesterday likened the downwards revisions to the BOJ's forecasts on the back of tariffs to a typhoon-linked "planned suspension" of public transport that now needs to be lifted. He also argued inflationary pressure is increasingly being driven by domestic factors.

Naoki Tamura's speeches are always clear and interesting. Some of his remarks today overlap with points I've highlighted the last few months: the strength of the Tankan survey and sakura report; repressed inflation in public services prices; the negative impact of inflation on pensioners.

In September, even before the renewed JPY depreciation of the last week, PPI inflation rose. By raising import prices, USDJPY back above 150 will mean input price inflation remains stronger for longer. The (relative) hawks at the BOJ will be becoming more convinced that inflation is sustainable.

With JPY depreciation unpopular and the cycle intact, it is unlikely that the Takaichi administration can really make the BOJ hike even more slowly than it has been. The policy that would work better for defusing the cost of living crisis would be fiscal loosening to raise household incomes.

One of the data points that challenges the BOJ's confidence on wage-price developments is slowing part-time wage growth. That ticked up in August, as did base pay for full-time workers. By historical standards, both are high, but growth in overall earnings growth continues to trail price inflation.

The main takeaway from Governor Ueda's speech today was that he remains concerned about the impact of tariffs. That isn't unreasonable, and more than today's rise in UE, is a reason to think rate hikes aren't a done deal. However, I still think the Tankan has pushed the BOJ further in that direction

Inflation indicators in yesterday's summary release of the Tankan were already firm. Today's comprehensive release paints a picture that is stronger still. The implication is that one of the BOJ's older measures of underlying inflation, the trimmed mean, is likely to remain above 2% for the next 6M.

Tomorrow's comprehensive release will add more details, but today's summary Tankan looks solid, for overall sentiment, the labour market, and inflation. For BOJ doves looking for reasons not to hike further, the Tankan doesn't supply them.