A longer report addressing three misconceptions with Japan's fiscal position. Also, yet another month of very strong export data for Taiwan. The driver is the sale of semiconductors to the US. In November, the bilateral trade surplus with the US reached 25% of Taiwan's GDP.
There is little growth in exports outside of tech in general, and semiconductors specifically. But the surge in chip exports is big enough to offset all the weakness in other products. The overall trade surplus eased back in November, but the bilateral surplus with the US reached 25% of Taiwan GDP.
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.
China's exports rebounded in November, and so did the trade surplus. In Japan, there is lots of data to discuss today: the second release of Q3 GDP, EW survey, wage growth and BOP. There are some mixed messages, but one theme is stabilising real wages and stronger household confidence.
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 weakness in exports of October reversed in November, with a rebound in growth to ROW, and shipments to the US stabilising. Auto shipments reached a new all-time high, and are growing as quickly this year as in the initial take-off in 2023-24. Import demand declined, so the trade surplus rose.
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
Today's data show another surge in overseas equity buying in Korea, consumption in Japan that is quite strong considering the headwinds of population decline and real income squeeze, and inflation in Taiwan which has now fallen to 1.2%, but I don't expect will drop much further.
The big shift in Korea's BOP since 2020 has been the rise in overseas buying of equities. That outflow surged anew in October to a record high, and by offsetting the large current account surplus, has helped keep $KRW near record highs.
In advance of next week's release of CPI and PPI data in China, some thoughts on the outlook, which I think shows a lessening deflation. Also, an update on visitor arrivals in the region (strong in Japan, weak in Taiwan), and weekly flow data in Japan.
High-frequency data show upstream prices remained stable in November, while food prices have been rising. The combination points to a further lessening of headline deflation. I doubt that signals a real turn in nominal growth, though there are now some upside risks.
China's November S&P services PMI didn't confirm the weakness seen in the official version. S&P today also released its services PMI for Japan. That sent the same message as other sentiment surveys: far from weakening, economic momentum in Japan is improving. Also today, my latest video and podcast.
My latest video, focusing on Taiwan and Korea, and a podcast in which I discuss the outlook for the broader region.
Japan's consumers like what they are seeing of Sanae Takaichi, with another bounce in confidence in November. That removes another reason for BOJ caution. In Korea, inflation remains at around 2%, but services inflation – a better measure of domestically generated price pressures – is higher.
The BOK says the rise in headline CPI inflation to 2.4% the last couple of months is temporary, and that core is stable. That isn't an unreasonable assessment. However, I'd continue to highlight the strength of services inflation, which remains firm reltive to ongoing labour market weakness.
The big policy event today was BOJ Governor Ueda's speech, which further increased the likelihood of a near-term hike. In terms of data, Japan released quarterly profits data (strong in non-manufacturing) and weak PMIs for the region contrasted with strong semiconductor export data for Korea.
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.
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.
The main themes: stabilisation in China, but the picture is muddy; the discrepancy between clear economic boom in Taiwan versus stability in inflation and TWD; upside risks in Korea that still look like risks than reality; the BOJ facing a real fiscal boost when the economy is already recovering.
The official composite output PMI in November fell below 50. That wasn't because of FAI: the industrial PMIs were stable. Rather, it was weakness in services. That is puzzling. For now, the one concrete indicator from today's inflation is actually positive: deflation isn't getting worse.
Today's charts cover October services trade and the implications for China's GDP growth in Q4; Tokyo inflation (showing stronger rents), and retail sales in Japan; weak October activity in Korea; and yet another round of strong GDP data in Taiwan.
In today's GDP release, the government raised estimated growth for Q1, Q2, and Q3. The FY forecast was raised by almost 3ppts to 7.4%. But because of AI, officials remain bullish about the outlook, and so raised the forecast for 2026 as well, And yet, none of this is expected to impact inflation.
The BOK's revisions to the GDP outlook yesterday were modest. But in today's October output data, there's little sign of any improvement at all. The data are affected by the long Chuseok holiday, and will likely look better through year-end. Still, it is clear the economy still faces headwinds.
The big event today was the BOK meeting. The bank was a bit more constructive on the outlook, but data that was separately released show labour market conditions remaining weak. Elsewhere, profits in China are flat-lining, exports in Japan aren't dropping, and macro data in Taiwan remain strong.
The BOK didn't raise growth forecasts above potential, but still signalled some concern about the resilience of inflation. That sounds a touch stagflationary, and was used to justify a step back from its loosening stance. Growth only gets above potential in its chip-driven upside scenario.