The platform for tracking and understanding East Asia macro
Earlier this week, I published a longer note delving into the macro and market implications of the semiconductor boom. You prefer pictures to text, so this is the accompanying chart pack.
China's cycle is weak, but I'm not yet convinced it is getting worse. Japan's cycle will now be improving, but the BOJ needs to show that it can keep up. The BOK's hawkish turn can go further still if the KRW remains so weak. I think inflation risks in Taiwan are broader than judged by the CBC.
Big oil price hikes matter, but have been seen before. It is the rise in chip prices, and the gap between surging trade surpluses and weak currencies, that is unprecedented. If fx markets don't price these developments, central banks and fixed income will have to do so instead.
Two of the cycle themes in the region are the strength of the AI trade, and macro stability in China. These in turn form the context for the third: the impact of the Iran war. If that conflict, finally, is near some kind of resolution, market confidence around rate hikes could actually increase.
The main regional themes weren't challenged by events last week: macro stabilisation in China; upside risks to inflation, particularly in Japan; and upside risks to growth, a theme for both Taiwan and Korea as long as the energy crisis in the Middle East doesn't derail the semiconductor super cycle.
Stabilisation in China seems to be becoming a more popular view. Hope is building for a BOJ hike in June, but one won't be enough. KRW should be strengthening, but likey needs more Middle East certainty. The big event for the region this week is the Xi-Trump meeting.
With the full consequences of the Iran War yet to be felt, the outlook remains uncertain. But so far, upside risks to inflation in the region are dominating the downside risks to growth. The big driver is the semiconductor cycle. The pack starts with regional themes, then 15 charts for each economy.
As usual, a recap of research over the last week but today, no refresh of market themes. I am now away for a few days, so updates will re-commence when I am back on May 4th.
Two themes stand out. First, macro in China is stabilising following the multi-year decline triggered by the twin shocks of the three red lines and zero covid. Second, the chip supercycle has yet to be derailed by the Iran War.
My latest video, discussing the impact of the Iran war on the outlook for the region
The themes around China as a relative safe haven, and firming inflation in Japan, are clear. The inflation picture in Japan supports rate hikes. Korea, by contrast, is messier: there are positive dynamics like the surging trade surplus and WGBI inclusion, but the KRW still can't stabilise.
This week's three themes: 1) rising inflation despite government attempts to hold prices down; 2) growth that might be starting to wobble but hasn't clearly turned down yet; and 3) huge uncertainty about the direction of events in the Middle East.
It isn't yet all about the war, given the real strength in semi demand. That backdrop is one reason to think underlying inflation will be lifted by the latest crisis. The durability of the AI cycle will also be the canary in the mine for a negative supply shock becoming a negative demand shock.
I spent time last week delving into export prices and terms of trade, dynamics that should be offering support for currencies. The data flow was all about Japan, and painted the picture of an economy in good shape. That could yet be undermined by policy choices, either at home, or in the US.
Three themes from last week: improving terms of trade, led by rising export prices; expanding current account surpluses; and growing optimism about the sustainability of AI-related hardware demand that is critical for cycles in Taiwan and Korea. Also, happy year of the (fire) horse.
The fundamental themes for the region are rising external surpluses, improving manufacturing cycles, and lessening deflation in China. That mix should be helping currencies. The offsetting factors to be monitoring are politics in Japan, flows, and global dynamics around tech and the USD.
Regional themes: continuing (and under-appreciated) nominal improvement in China; election uncertainty in Japan; strengthening export momentum in Korea on the back of chips; which in turn looks significant given the huge outperformance of Taiwan through 2025, all because of AI and semiconductors.
Is a ceiling forming for $Asia? Three developments are helpful: CNY fixing strengthening through 7; more US interest in Asia under-valuation; visible concern in Tokyo about weakness in both the JPY and JGBs.
Using an update of my regional chartpack to think about exchange rates. Specifically, I think the cycle and structure dynamics are moving risk-reward in favour of Asian currencies. I'd argue that is true if the global picture is unchanged, but it could also be true if conditions in the US falter.
Themes: capital flows v CNY appreciation in China; fiscal fear v real policy rate in Japan; foreign v domestic equity strength in Korea; policy status quo v export surge in Taiwan.
China: the nominal stabilisation is fragile. Japan: with the cycle looking good, the risk of a BOJ upside surprise is the highest since July 2024. Korea: the upside scenario from the semi cycle still isn't the base case. Taiwan: macro becomes more interesting if the chip cycle sustains into 2026.
Regional themes: lessening deflation in China, but no sign of real recovery; the BOJ is likely to hike this month, but the JPY needs a hawkish hike; outflows into overseas equities in Korea change usual exchange rate relationships; inflation risks in Korea and Taiwan if AI chip demand is sustained
My latest video, focusing on Taiwan and Korea, and a podcast in which I discuss the outlook for the broader region.
The mfg PMIs across the region mainly remain below 50. That shows that conditions outside of semiconductors remain poor. Semi is strong, and in Korean in export data for November, are departing from a normal cycle. Goods input prices pressures are rebounding, reflecting weak currencies.
Trump's visit will dominate the news this week, particularly his trade talks with China and Korea, and whether he says anything about the JPY in Japan. It now doesn't look like the BOJ will hike on Thursday, but the tone should be more positive. The data highlight will be Korean business confidence.