Economy in Brief

Money works with a lag but sometimes it’s reported with a lag too: U.S. and U.K. money supply data lag the results for the monetary union and for Japan by one month. Monetary trends currently based on the most up-to-date data, which are either May or June depending on the country we're looking at, show that three-month money supply growth, and credit growth in the case of the monetary union, have slowed compared to six months, except in the case of Japan. In Japan, for the six-month and three-month growth rates are identical at 1.9% overall; growth rates are lower over three months and six months compared to 12 months.

Real money balances: The growth rate of real money balances shows the step-down in growth in the monetary union from 1.6% over 12 months to a 1% annual rate over six months to a 0.6% annual rate over three months. Over the same sequence of dates, private credit in the monetary union has gone from 1.2% over 12 months to a pace of 1.4% over six months, and then down to 1.1% over three months. In the U.S., money growth over this period has decelerated from 2.5% over 12 months to 2% at an annual rate over six months to -0.4% over three months annualized. The U.K. shows a slightly different pattern for real money balances that grow 2.4% over 12 months, accelerate to 3.4% annually over six months, but then back down to a 1.6% annual rate over three months, showing a net deceleration from 12 months to three months but with an intervening bulge. In Japan, the money growth slowdown is monotonic, from 0.5% over 12 months to a 0.3% pace over six months to a -1.2% pace over three months.

Pattern reversal: Nominal money growth, which had shown some acceleration early in the year, is now beginning to show deceleration, and this is before central banks have generally begun to raise rates, although there have been ongoing rate increases of a slight amount in Japan and also the start of a tightening cycle in the European Monetary Union. In the U.S., there's a new head of the central bank and policies there are expected to shift, but the jury is out on what to expect, as is often the case with a new chairman. There are a variety of views on what he plans to do; he will most likely make his reputation by what he in fact does rather than by what he says about what he intends to do. On balance, growths in the U.S., the monetary union, and Japan are all showing deceleration with a slight exception from the U.K. But generally speaking, money supply no longer is showing a moderate disturbing acceleration pattern; in real terms, money growth has lost a great deal of steam, particularly in the U.S. and Japan, where three-month growth rates of real money balances are declining and show negative rates of growth.

Summing up These are new trends, and they are not much talked about in markets because markets don't speak the language of money supply growth much anymore. However, it's a good idea to continue to look at money supply and what it does. Just because central banks aren't targeting money doesn't mean that it isn't relevant anymore; it just means that central banks have put their attention someplace else. At present, central bankers seem to be arguing about where their attention should be. It could be a good time for us to keep close tabs on what money supply is doing.

In this week's Letter, we trace three threats converging on Asia's inflation outlook. The first is renewed US tariffs, with the latest salvo of duties imposed over alleged forced labour issues. That move is widely seen as a replacement for the now-expired Section 122 tariffs, with only mild incremental effects from the new Section 301 duties. Set against that, the US effective tariff rate has pulled back from its 2025 highs in recent months (chart 1). The second is the Strait of Hormuz, where the re-escalation of US-Iran tensions has once again reduced shipping volumes to a trickle. Crude oil prices have been driven up as a result (chart 2). It could have been worse, were it not for China's sharply reduced crude imports over the period (chart 3). Arguably, though, at least part of that reduced intake simply reflected the absence of supply from the Strait. The third is the ongoing El Niño event, which several authorities have warned will likely be the largest on record (chart 4). It risks disrupting food crop yields, among other effects, channelling a price shock through food supply. Together these pressures threaten to upend the pullback in commodity inflation seen in recent months (chart 5), once again complicating policymaking. As an aside, we also explore economy-specific political developments that are brewing or could become an issue further down the road. One is the recent resignation of Indonesia's central bank governor, which came amid protracted rupiah weakness (chart 6) and concerns about fiscal health.

Tariff trouble Recent US forced labour tariffs have revived concerns, pushing the tariff theme back to the fore. The US imposed additional Section 301 duties of 10% or 12.5% on imports from 60 investigated economies, effective 24 July 2026. These followed USTR investigations into those economies' failure to impose and enforce prohibitions on goods produced with forced labour. They took effect the same day the temporary 10% Section 122 global surcharge expired by statute, and are seen as its replacement. Yet overall US effective tariff rates, calculated as duty as a percentage of the respective dutiable value, have pulled back significantly from their 2025 highs (chart 1). That retreat began with the numerous bilateral trade deals the US eventually struck with many of its trading partners. It went further in February, when the Supreme Court struck down President Trump's tariffs imposed under the International Emergency Economic Powers Act (IEEPA). That ruling dented the overall impact of US tariffs on its trading partners, with possible tariff refunds still in the works. Cutting the other way, the Section 122 surcharge had partially raised overall rates while it ran. Even so, some estimates suggest the new duties will only marginally increase US effective tariff rates on its trading partners.

The Bank of Japan is in a bit of a policy pickle. Inflation has picked up. After a long period of super-low inflation and interest rates, the policy rate itself has only been lifted to 1%. The BOJ faces a world with key geopolitical strains, higher inflation, supply chain disruptions, and rising oil prices with gains in other commodity prices as well. The war in Iran and the closure of the Strait of Hormuz, after a brief respite in June, is back in force. The future is again clouded and has led to negativism.

The yen has been weakening; that has put the BOJ in another difficult spot. So far, it has been unwilling to use interest rates to defend it. And we know that intervention is only a fleeting tool and not any sort of lasting solution.

But with all this on its plate, the BOJ has to deal now with some unexpected fiscal stimulus. The Takaichi government, like every Japanese government, has a special relationship with the central bank having two representatives at BOJ meetings, one from the MOF and another from the Cabinet Office. These representatives do not vote but can request that policy moves be delayed. Still, the BOJ has become more independent since 1998 when governing laws were changed. BOJ is directed to cooperate with government and to act independently. Earlier this year, when inflation flared on rising oil prices, the Takaichi government took steps to mute the impact on Japan’s inflation. So its inflation data have been dressed up a bit by inflation-suppressing government programs, which also make it seem less pressing that the BOJ act.

Still, inflation is heating up. The core inflation rate, which excludes fresh foods & energy, is now at 1.7% year-on-year, while the suppressing impact of some of the government programs is still in force. For its part, the BOJ has seen firms reporting more pass-throughs of prices and cost increases, making it more wary of building inflation pressures.

French manufacturing saw its climate index rise to 101.3 in July from 100.2 in June, still below its May level and exceeded by readings from December 2025 to February 2026. Apart from those four readings, the French index was last stronger in March 2024. On data back to April 2023, some 40 observations, the industry climate index has been higher only six times. Still, on data back to 2001 the current climate reading has a 53-percentile standing. While the current reading is slightly above par on a long historic timeline and just above its median reading, which occurs at a ranking of 50, its 53-percentile ranking marks it as slightly above its historic median; however, it is quite strong compared to the past 40 months (3 1/3 years).

Manufacturing production expectations have improved slightly over the past year from -11.9 to -10.1, with a 38.6 percentile standing, below its historic median.

The recent trend for production has improved even more sharply over the past year from -2.5 to +7.3, with a 59.8 percentile standing, well above its historic median. Interestingly, when asked about their own industry, survey respondents were less upbeat as the current reading at -0.6 was better than its year-ago -5.0, but only at a 16.3 percentile standing, a rather dismal showing.

Orders & demand and foreign orders & demand both moved up from their year-ago readings, improving by some six to eight points from their respective year-ago levels. Orders & demand overall have a 69.9 percentile standing, quite a solid reading, compared to foreign orders & demand, with only a slightly above-median 50.7 percentile standing.

Pricing finds both the own likely price level and the overall manufacturing level higher than they were a year ago. Own prices are higher by 3.1 points while manufacturing prices in general are deemed higher by 18.8 points, a massive difference. But the price levels by each response, placed in a percentile standing mode, produce standings at about the 75th percentile for each of them.

The graph shows French manufacturing prices on another up-down cycle. The down phases triggered rapidly this time; however, it is probably going to give way to another spurt with the Middle East progress unraveling that progress; it has already happened in the real world but is not yet reflected in published economic reports. That means we will have to monitor the industry recovery path closely again.