Slowing, slowing, slowing. There's a whole slew of slowing going on ...
Besides the reassuring numbers for U.S. inflation, which finally show that price increases are coming under control, the pressures of higher prices are also easing in Asia. The region has largely been spared the worst of the price hikes seen in the West. But these latest numbers give central banks reassurance that they don't need to get in a rate-hiking competition with the U.S. Federal Reserve to preserve their assets, in particular their currencies.
China's inflation rate is incredibly low. It edged up in December but remains at an extremely manageable 1.8%, a smidge higher than the 1.6% price hike the prior month. Producer prices are moving in reverse, down -0.7%, which indicates that costs for consumers are unlikely to rise fast anytime soon. The producer price decline is stemming from -1.3% the previous month, the result of China's disastrous stop-start reemergence from Covid.
Inflation in India is far higher. But it too is coming into line, price hikes down to 5.7% for December, from 6.1% the previous month.
So you have slowing inflation in Asia's two most-populous nations. Its second-largest economy, Japan, is desperately attempting to spark inflation of 2% or so.
Japan is currently getting its wish, with prices increasing 3.8% in December, but that's unlikely to last -- it's largely the result of higher fuel prices for a nation that imports all its oil. The 3.8% rate was little-changed from November's 3.7% pace, so it looks like Japan, as with the United States, is seeing the crest of the inflation wave.
Japan is so used to deflation, thanks to the "lost decades" following the bursting of its 1980s asset bubble, that the current pace of inflation is the highest since 1981. It's certainly a shock to the system for consumers, who aren't accustomed to prices rising, well, ever.
It may be enough to force the Japanese economy into a short contraction. Japanese GDP may have contracted 0.2% for November, the Japan Center for Economic Research forecast this week, with higher prices hurting private-household spending. But Q4 may nevertheless have posted a 2.9% increase in Japanese economic activity. So there's no recession on the cards.
Excluding food and fuel, Japanese prices are not yet truly advancing. And wages remain stubbornly sticky. It was therefore with real encouragement that we heard this week that Uniqlo's parent company, Fast Retailing (T:9983) (FRCOY) , plans on raising wages by as much as one-third. We are heading into the spring labor-negotiation period for Japan and South Korea, so unions and employees will be looking to guarantee their pay is keeping pace with inflation.
Average pay in Japan is just US$39,711, as of 2021 figures, well below the OECD average for developed economies of US$51,607. It has not changed much at all since the early 1990s.
Japanese Prime Minister Fumio Kishida, currently on a whirlwind tour of G7 nations as part of Japan's presidency this year of the group, has been desperately calling on employers back home to raise wages. It may have been a faux pas last year for Japanese central bank governor Haruhiko Kuroda to say it would be a good thing if Japanese consumers come to expect higher prices -- but he clarified, quite correctly, that it would be a positive if it comes because wages and incomes can also rise.
Uniqlo, struggling to find store staff in an ageing, declining population, says it will boost pay for new graduate employees to ¥300,000 (US$2,330) per month, up 17.6%. New store managers will see their take-home rise to ¥390,000 (US$3,030), up around 36%.
Economists are already calling the December inflation numbers the Japanese peak. Every nation around the Asia Pacific region should see lower inflation in 2023, bar China and Hong Kong, which had such a disrupted 2022.
"The rate hiking cycle is in its finale," Nomura says of Asia, in its global outlook for 2023. "Disinflation" will truly set in for the second half of this year, and if growth also slows, central banks may start cutting interest rates in 2H 2023 as well as for 2024. India, for instance, may have a final rate hike in February, followed by 75 basis points in cuts by the end of the year.
With appetite growing for Asian allocations, and capital flowing into the region, those trends are all generally positive for Asian equity markets. The quant stars seem aligned for an Asian rally in 2023.