Consumers aren't sure that inflation is easing, with price expectations remaining strong in June. But with consumer confidence down and other data today showing the monitoring index falling, the CBC won't be thinking inflation is about to bounce back.
Profits fell 9% YoY in May, and are now close to 5% of GDP, a level that's only been breached twice in the last 15 years. The driver is more demand- than supply-side, in the sense that the upstream profits, hit by the property downturn, are weakest. But even in machinery, profits aren't rising.
I'm just starting to catch up with things, and one of the first things I've made sure to look through is yesterday's speech by BOJ Monetary Policy Board member Naoki Tamura. He doesn't represent the majority view, but his speeches are well worth reading, and this one was no exception.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Given regional history, China's transition to exporting more capital goods shouldn't be unexpected. More unusual is that 1) this transition hasn't been accompanied by slower overall export growth, and 2) has occurred at the same time as a sharp slowing of imports. Chart pack attached.
Data today show Taiwan's NIIP surplus dropped a little in 2023, but remained extremely large. Those assets have been accumulated via strong exports, 60% of which are now "high-technology". And yet, the TWD through April weakened, with one measure of the REER no higher than 2001.
My latest video, discussing how Korea is managing to avoid the labour market decline that would usually be expected as the population ages. This is likely to dampen wages – and potentially inflation – in Korea relative to Taiwan, where the part rate isn't rising in the same way.
Today's quarterly business outlook survey shows more incremental weakness in business sentiment, led by manufacturing. That's another sign that tariffs in particular have taken the edge of the cycle. However, there's not yet signs of real deterioration, which capex firm and employment still tight.
Relative to history, Taiwan's wage growth remains strong. As would be expected, that's being led by manufacturing, though services wages have been firm too. For now, the downside for rates remains a structural appreciation of the TWD, not a problem with the cycle.
PPI inflation eased in May, falling to 3.2% YoY, down from the recent peak earlier this year of more than 4%. The ongoing decline in JPY-denominated commodity prices shows this process has further to go, but feed-through into PPI will likely be dampened as importers try to restore profit margins.
Today's labour market data show unemployment low but private sector employment weak. Business confidence should improve after the election, but other data released today for trade in the first 10 days of June show overall exports remaining lacklustre, even as semi exports start to pick up again.
May was a bit softer for TSMC, but sales are still 26% higher than at the beginning of the year. That matters a lot for the overall economy, given that semiconductors are about 50% of exports, and outside of semi, exports aren't growing much, if at all.
The sharp reversal in exports expected by the government isn't showing up yet. Shipments rose strongly again in May, and are now 17% higher than in December. With imports weaker last month, the trade surplus increased to near 20% of GDP, a new multi-decade high. The biggest driver remains the US.
Sentiment in the Economy Watchers survey still points to slower GDP growth in 2H25. However, it now isn't particularly weak, improving in May back to the long-term average of the survey. That's probably not enough for the BOJ, but likely would be if Japan can now land a trade deal with the US.
Overall trade trends – strong exports, weak imports, and a big trade surplus – remain in place. But the Trump tariffs are causing big shifts in the structure of exports. Direct shipments to the US have fallen 40% this year, and excluding the pandemic, haven't been this low since 2013.
CPI was surprisingly firm in May, with core continuing to show a reversal from the deflation of 2024. Overall, however, nominal indicators remain very weak. Leads for core have started to deteriorated again, and PPI deflation accelerated in May. The GDP deflator will be negative once again in Q2.
In the second release of Q1 GDP, consumption was revised higher. In aggregate terms, there's still no convincing trend up, but the per capita level of spending is now as high as the previous record peak in 2014. The revision boosted GDP to flat QoQ, even though capex was revised down.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Consumer sentiment has been sliding, but in April, the BOJ's measure of consumption was firm. It is still well below the pre-covid level, but the numbers look consistent with the BOJ's view that consumption is on a "moderate increasing trend".
The S&P PMIs indicate slower growth in May, with the mfg PMI dropping sharply, and today's services PMI sluggish. Both also suggest more deflation. In today's survey, input prices ticked up, but selling prices were pushed down by "greater competition for new work and promotional activities".
With the bigger shunto rounds since 2023, wages have tended to jump early in the fiscal year. That was true this year, with full-time regular wages in April back to the faster post-2023 trend. However, part-time wages were flat, which will matter if confidence and the cycle don't rebound in 2H25.
High-frequency data continue to point to a faster rate of deflation in China in recent weeks. One reason is lower energy prices, which should bring some economic relief to downstream firms, but building materials and steel prices are also falling. Cyclical momentum the economy remains very weak.
The important detail in today's CPI release for May was the drop in MoM core. Given the weakness of demand – now beginning to show up more clearly in the labour market – that moderation should persist. With global commodity prices weighing on headline, inflation should be less of an issue in 2H25.
The tone of Ueda's speech today was rather constructive. Of course, he discussed the risks from tariffs, but didn't think they were likely to derail the economy. If some kind of Japan-US deal can be reached – and progress is reportedly being made – BOJ hikes will quickly be back on the table.
A shorter video that last time, summarising the most important issues for each economy, giving a regional ranking, and discussing market implications.