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A video bringing together the arguments I have been making for the last few months on how the economic factors that that helped anchor the TWD in its tight 28-33 range from the late 1990s are now changing.
Today's monetary data continue to suggest that the economy has bottomed, but don't point to a big recovery. Non-state and mortgage lending have stopped deteriorating, but don't show signs of the sort of recovery that would lift economic activity.
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.
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.
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.
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.
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.
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.
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%.
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.
Export orders fell sharply in April, but the PMIs overall weren't so bad. One reason is a bottoming of the construction cycle. That, however, isn't improving, and with prices and the business outlook falling again, the economy still isn't on a stable footing to get through the tariff shock.
Like most other observers, I think it unlikely that the BOJ changes policy this week. But given domestic price developments, there isn't much room for dovishness. And if the US really wants to tackle global imbalances, it has an interest in creating the conditions that allow the BOJ to hike further.
Profits did rise YoY in March, but because of the base effect. Relative to GDP, earnings remain sluggish. Unsurprisingly, given the collapse of real estate, heavy industry is weakest. But in manufacturing, aggregate earnings aren't strong either, and around one-third of all firms are losing money.
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A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Tokyo CPI in April was boosted by changes in official subsidies. But inflation remains broad-based. Food prices were up, and rental inflation jumped – important, given the near 25% weighting. Services inflation didn't shift much, but the trend will be clearer with April national CPI and SPPI.
Business sentiment fell again in today's survey, and has now only been worse during the global financial crisis and covid. Exporter sentiment has ticked-down, but the weakness is much more apparent in domestic, non-manufacturing sectors. Further policy easing is ahead.
Taiwan macro doesn't attract much attention, but its experience matters. Taiwan was most exposed to the 2000s China shock. That it then suffered near-deflation reflected tight fiscal policy, a lesson that needs to be learnt in dealing with the latest shock, this time emanating from the US.
Export volumes have ticked up this year, but not by enough to think that JPY weakness is finally boosting sales. That has a silver lining: just as JPY weakness didn't boost real growth, a strengthening currency won't lead to much deterioration. There will, however, be an impact on nominal earnings.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.