Economy in Brief

In this week's letter, we examine monetary developments in Asia. In particular, we take stock of the latest decisions by central banks in the region and delve into the possible motivations behind them. We find that while the Fed's policy trajectory remains a key policy focus, their recent actions have also been driven by domestic factors. Furthermore, we also find their policy priorities to be wide-ranging, with some aiming for currency stability, while inflation remains the focal point for others.

In Japan, recent bouts of yen appreciation have fueled speculation about potential currency intervention by the authorities. Also, the Bank of Japan’s latest summary of opinions indicates an unexpected shift from some members towards a more hawkish stance. In South Korea, persistently high inflation and potential improvements to Q2 GDP growth serve as reasons for the central bank to keep rates higher for longer. In Indonesia, the central bank’s recent surprise rate hike has drawn attention to its focus on currency stability and its broad range of policy tools. In Thailand, the central bank remains committed to maintaining its policy rates, despite ongoing governmental pressure for looser policy. Finally, in Malaysia, we acknowledge the central bank's consistent approach to policy rates and explore recent developments concerning the ringgit.

Japan The yen experienced sudden bouts of appreciation in early May, with the USD/JPY exchange rate having fallen by about 3% through May 2-3 (Chart 1). The moves spurred speculation that Japanese authorities had stepped in to support the yen following its prolonged spell of weakening this year. To infer possible episodes of currency market intervention, some market participants have turned to analyzing the Bank of Japan’s (BoJ) daily current account data for clues. Specifically, market participants looked at the BoJ’s daily net receipt of funds and contrasted them with broker-estimated figures to estimate possible currency intervention activity. Regardless, and despite its sporadic moves, the yen seems to have resumed its previous trend toward weakening. This has been fueled in part by the still-wide yield differentials between Japan and other major economies.

Japan’s economy watchers index stayed below the breakeven threshold of 50 in April, falling further to 47.4 from a level of 49.8 in March. These numbers compare to a reading of 51.3 in February. Over 12 months, the economy watchers index has fallen by 5.9 points. It made 3.3 points of that drop over six months and 2.8 points of that drop over three months. Taking the April level of the economy watchers index and expressing it as a percentile standing, the level is at 49.8%. A standing below its 50th percentile means it is below its median when ranked among data since April 2003.

The economy watchers subindexes across industries and the other functional categories show slippage (diffusion below 50) for each one between March and April. In addition, all categories weakened in March compared to February except for the reading for eating and drinking places and the reading for employment. And many March diffusion readings are below 50. The economy watchers index is clearly on a run of weakness.

Overall the current index ranks below its historic median as we noted above; components that are below their median values are retailing, manufacturing corporations, and employment. The employment reading is the weakest one in the table with the standing only at its 29.6 percentile. At that ranking, it sits near the top of the lower third of all observations since April 2003. That's an all-too-weak reading for such an important index for the economy.

Sequential changes in the current index show over three months all components are lower on balance except nonmanufacturing firms. Over six months, all components are lower on balance except nonmanufacturing firms and housing. Over 12 months all components are lower on balance except for housing. The Bank of Japan has had some concern about inflation and these concerns have become a bit more two-sided; a weakening economy is not going to allow the BOJ to raise interest rates and to proceed in its objective of returning monetary policy to a range of normalcy. Consumer spending in Japan has been weakening as well. Overall, the economy watchers index fits into a profile of an economy that's weakening rather than strengthening.

The future index The economy watchers index has a future component. This component also weakened in April compared to March and has slipped below a diffusion value of 50, dropping to 48.5 in April from 51.2 in March. This indicates falling expectations. The percentile standing of the future index is in its 47.8 percentile, below its historic median also on data back to April 2003. All the readings for the future index have diffusion values below 50 in April except for employment, which moved up slightly to 51.3 in April from 49.4 in March. And all the components in April weakened compared to March except for that employment reading. In addition, all the components in March had weakened compared to February except for retailing. This gain is broad-based weakening clustering at values close to the diffusion level of 50 that marks the dividing line between expansion and contraction.

Like the current index, the future index is mired in a patch of weakness. Over three months all the future indexes are lower on balance with the headline falling by 4 points over three months. Over six months all of the components are lower on balance except for retailing that is up by 0.7 points. The future headline is lower by 1.3 points over six months. Over 12 months all the components are lower without exception and the headline is lower by 6.1 points.

Clearly, expectations have been scaled back for Japan’s economic performance. The headline’s 47.8 percentile standing leaves it below its historic median. This result is, in part, generated by a housing reading below its median at the 39.1 percentile and by manufacturers with a 39.5 percentile standing. Employment has a 43.5 percentile standing which is below its median but not as weak relative to other past future readings as the current index for employment is weak compared to its past index values. So as weak as the current economy is on the employment side, the future economy doesn't have the same degree of pessimism associated with it as the current index.

Ireland continues to produce good inflation news in April. The HICP index rose by 0.1% in April logging a 1.6% increase from a year ago, well within the target set by the European Central Bank for inflation in the entire Monetary Union. Ireland also reported a 0.3% increase in April for its domestic CPI gauge; that gauge is up 2.8% over 12 months. Ireland's CPI core fell by 0.1% in April and it's higher by 3.5% over 12 months. The annual rate difference between the inflation rate for the European Monetary Union inflation index known as the HICP, and Ireland's domestic CPI appears wide at 1.6% versus 2.8%; yet, both year-over-year changes are at 33-month lows. The domestic CPI core inflation rate is at a 27-month low. While these three gauges measure inflation in slightly different ways, it's quite clear that for the measure that each chooses to assess inflation, each has made a substantial reduction from where it has been and that all three gauges are showing substantial as well as ongoing inflation progress.

Different metrics but tracking the same forces However, since Covid stuck, the differences between the core and the HICP and HICP and CPI have become magnified. Much of that is because of the growing difference in inflation lags and developments between the core and the headlines when inflation accelerates due to different causes. Still, the CPI headline and the HICP headline are more inconsistent than they were prior to August 2021. In the earlier period, there would be a standard deviation between the headline readings of annual inflation of 0.2%; that has grown to 0.6% after August 2021. However, the difference has shown signs of declining recently. The correlation between the headline HIPC and core has actually improved in the Covid period. This reinforces the belief that inflation is a singular force being tracked by both methods with differences stemming from their methodologies and weights rather than there being different underlying inflation dynamics at work.

Sequential results Sequentially the ECB inflation measure, the HICP, rises by 1.6% over 12 months, falls at a 0.5% annual rate over six months and then rises at a modest 1% annual rate over three months. The Irish CPI gauge shows at a 2.8% year-over-year increase, a 0.6% annual rate rise over six months and a 1.6% annual rate gain over three months. Ireland's CPI core rate rises 3.5% over 12 months, at a 1.6% annual rate over six months and at a 2% at an annual rate over three months. All three gauges show six-month inflation below 12-month inflation as well as 3-month inflation higher than 6-month inflation but also 3-month inflation below the pace of its 12-month gain. So once again, we can look at different inflation measures and the absolute reading on inflation is going to be different depending on what we mix into the pot. Regardless of that, it appears that the overall inflation pressures in Ireland are consistent and behaving in a similar fashion regardless of which of these metrics we look at.

Inflation across categories The diffusion gauge for the domestic CPI, which looks at accelerations across the CPI categories, marks accelerations as the value of 1 and unchanged inflation as the value of 0.5. Summing these and presenting them are proportional results, produces a diffusion rating at 50% when inflation is accelerating and decelerating in equal proportions, a value above 50% when inflation is accelerating in more categories, and a value of below 50% when inflation is decelerating in more categories. Inflation diffusion for Ireland is at 33.3% over 12 months, 33.3% over six months, but rises to 54.2% over three months. This calculation shows us that 12-month inflation compared to 12-months ago is decelerating in nearly 70% of the categories; that, over six months compared to 12 months, inflation is also still decelerating in nearly 70% of the categories. But, over three months, the inflation rate accelerated in slightly over half of the categories. And that's not surprising. Look at how the headline inflation rate for the CPI and for the core performed over this period. Although the diffusion calculation doesn't necessarily agree in all cases with changes in the headline diffusion and the weighted inflation headlines show the same trends. Diffusion is a separate measure that looks at the breadth of the inflation trend by assessing whether inflation is rising or falling across the various categories and then toting up the results. The diffusion measure neither looks at the magnitude of the change in inflation nor imposes any weight across the categories; it is simply looking at the change in inflation across various categories.