Unemployment remains low, but wage growth isn't accelerating. The reason is the big structural changes in the labour market of recent years, which have increased the number of part-time jobs. That shift is likely to reduce the bargaining power of labour, and generate a structural slowdown in wages.
The gap between PPI and import prices is a useful way of thinking about inflation and the BOJ. Usually, the gap is closed as import prices are cut by a combination of global recession and JPY strength. If neither happens, PPI inflation isn't likely to recede, and BOJ hikes will remain on the table.
Tariffs are reinforcing the hit from rising prices, causing a sharp fall in corporate confidence in the April EW survey. Household sentiment was stable, but USDJPY rising back to 150 means downside risk. That keeps rate hikes on the agenda, though the BOJ would clearly like tariffs to fall first.
A key component of the structural shift in the economy is rising wages. That continued in March, with signs of another acceleration in manufacturing wage growth on the back of strong exports. As a result, overall wage growth is once again over 3%, as quick as during the recovery out of covid.
The market sees TWD moves as a function of US pressure and lifers. The CBC says it is all about exporters. I see a step-change in exports from 2020 that has ended deflation and exacerbated the CA surplus. The TWD consequences of that shift are stronger if US tariffs don't trigger a global recession.
Today's 10D May export data were stable, but that won't ease the growth concerns visible in last week's minutes of the BOK April meeting. It seems the member who voted for a cut was weighing more than 25bp. But another member warned against being "bold", saying that monetary easing wasn't working.
The sharp drop in exports in the first 10 days of May doesn't show tariffs are having an impact. Rather, the decline was because of a fall in the number of working days. But the data do show that Korea's export cycle remains weak, with shipments in level terms treading water for a year.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
After the deflation of much of 2024, core sequential inflation has now been positive for six months. But it is now still only +0.2% annualised, and doesn't look to be going higher. Indicators for PPI suggest even more deflation ahead, with the one exception being the decline in the USD.
With the slowdown in official wage growth in the last couple of months being so sharp, and so at odds with other labour market developments, I would assume it is due to technical factors. I'd be more concerned if the new shunto isn't reflected in this month's SPPI print, and wages next month.
Data released yesterday showed April as being another boom month for Taiwan exports. TSMC's sales today suggest exports might be stronger still, with TSMC's revenue rising even more quickly than in the 2020-21 post-covid recovery. That's remarkable, even allowing for front-loading.
The expected fall in exports to the US did happen in April, but that was offset by stronger shipments to ROW. I wouldn't expect that to continue, but it is worth noting that today's data showed an increase in imports of components, which would usually indicate stronger exports in the next 3M.
A lot of market discussion in recent days has centred on hedging by the lifers. The central bank, however, has argued that the move in the TWD was driven by exporters. That is believable: exports grew remarkably strongly in 2020-22, and have done so again through April this year.
My framework for Taiwan and the TWD is a structural economic recovery driving a normalisation of inflation after the near deflation of the 20 years before 2020. That remains the theme, but there is now a clear cyclical slowing of CPI. That will intensify if tariffs trigger an export recession.
The exact timing of monetary easing can vary, but today's interest rate and RRR cuts are not a surprise. Today's moves are consistent with the PBC's usual reaction function, and with inflation so weak, further loosening should be expected.
Politically, China might well be prepared for the trade war. But I remain sceptical that is true economically. The headline of today's Caixin services PMI was soft, and the commentary noted confidence falling "to the second-lowest level recorded since data collection began in November 2005".
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.
Given the global uncertainty, the headline manufacturing PMIs released in the last couple of days for China and Japan didn't look too bad. The tariff impact is much more visible in today's Korea and Taiwan PMIs, both of which declined sharply.
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%.
Today's BOJ's GDP downgrades were all about tariffs affecting corporates. The bank didn't sound worried about consumption. But in today's data releases, the manufacturing PMI ticked up, while consumer confidence fell sharply to a level that's only been lower three times in the survey's history.
The gap in GDP growth that has opened up between Korea and Taiwan since 2020 reflects exports, but also consumption. Data today show Korean retail sales did perk up in March. But even after that, sales are still barely above the level of late 2019, while in Taiwan they've grown almost 15%.
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.
Goods consumption in Japan continues to struggle, with real etail sales dropping in March back to the lowest level in two years. Services consumption has been stronger, but the renewed deterioration coincides with a rebound in inflation, which is once again squeezing real incomes.