Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070130d.jpg" width="353">
The economic news out of Japan is ambiguous. Production and exports are strong, employment, retail sales and family living expenditures are weak. The yen has depreciated sharply in recent weeks against the euro and the dollar. The yen is, currently, at its lowest point against the Euro since the introduction of the Euro in 1999.
Japanese industrial production made a new record in December, 2006 at 109.5 (2000=100), exceeding previous peak levels reached in 1991, 1997 and 2000 as can be seen in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070130e.jpg" width="353">
The strength in the production sector has not come from domestic consumer demand but, rather, from export demand. The second chart compares the index of retail trade and the value index of exports, both with a base of (2000=100). The index of retail sales was 92.0 in December, down from 92.2 in November and from 92,7 in December, 2005, while the value index of exports was 161.79 up 5.0% from November and 9.84% from December, 2005. Expenditures
Part of the sluggishness in retail trade is due to the relatively slow growth in employment. The third chart compares retail sales with total employment. There is a good correlation between the two series--.92. Although employment in December was 0.7% above the year ago figure it was 0.5% below November, 2006. Moreover, the unemployment rate rose by one percentage point to 4.1% in December.
Depreciations of the yen against the Euro and the U.S. dollar have stimulated the demand for exports. The very rapid depreciation of the yen in recent weeks is shown in the fourth chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070130f.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070130g.jpg" width="353">

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<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">Dec&nbsp; 06</th>
<th scope="col">Nov 06</th>
<th scope="col">Dec 05</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y%</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Industrial Production (2000=100)</td>
<td>109.5</td>
<td>108.7</td>
<td>104.9</td>
<td>0.74</td>
<td>4.39</td>
<td>105.9</td>
<td>101.6</td>
<td>100.0</td>
</tr>
<tr>
<td class="firstcol"> Exports </td>
<td>161.7</td>
<td>154.0</td>
<td>147.21</td>
<td>5.00</td>
<td>9.84</td>
<td>145.70</td>
<td>127.10</td>
<td>118.42</td>
</tr>
<tr class="odd">
<td class="firstcol">Retail Trade</td>
<td>92.0</td>
<td>92.2</td>
<td>92.7</td>
<td>-0.22</td>
<td>-0.76</td>
<td>93.1</td>
<td>93.0</td>
<td>91.7</td>
</tr>
<tr>
<td class="firstcol">Family Living Expenditures</td>
<td>92.8</td>
<td>93.8</td>
<td>94.0</td>
<td>-1.01</td>
<td>-1.31</td>
<td>93.0</td>
<td>94.8</td>
<td>95.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Employment (millions)</td>
<td>63.83</td>
<td>64.15</td>
<td>63.41</td>
<td>-0.50</td>
<td>0.66</td>
<td>63.83</td>
<td>63.57</td>
<td>63.29</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate (%)</td>
<td>4.1</td>
<td>4.0</td>
<td>4.4</td>
<td>0.1</td>
<td>-0.3</td>
<td>4.1</td>
<td>4.4</td>
<td>4.7</td>
</tr>
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The economic news out of Japan is ambiguous. Production and exports are strong, employment, retail sales and family living expenditures are weak. The yen has depreciated sharply in recent weeks against the euro and the dollar. The yen [...]

No Clear Direction for the Japanese Economy in Recent Statistics

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Recent strength in factory sector production generated life in pricing power. The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) rose 1.0% (2.1% y/y) during the four weeks ended January 17, 2025, reversing a 1.0% decline in the prior four weeks. The level of the index was its highest since the second week of November.

Leading the rise, Crude Oil & Benzene group prices strengthened 4.0% (-2.3% y/y) in the latest four weeks. The cost of West Texas Intermediate crude oil jumped 11.2% in four weeks to $78.33 per barrel and stood 7.4% higher y/y. It was increased from a $68.58 low in the first week of December. The cost of the petro-chemical benzene, used for making plastics & synthetic fibers, eased 0.4% (-22.8% y/y) in the last four weeks. Excluding crude oil, the industrial commodity price index edged 0.4% higher (1.7% y/y) in the latest four-week period.

Also moving higher, prices in the Miscellaneous group improved 1.9% during the last four weeks and rose 5.1% y/y. Plywood prices strengthened 8.5% over the last four-week period (7.6% y/y) while the cost of natural rubber improved 1.4% in four weeks, but jumped 32.6% y/y.

To the downside, prices in the Metals group slipped 0.6% (+5.0% y/y) over the most recent four weeks. Zinc prices fell 6.4% (+14.0 y/y) in four weeks and steel scrap prices were off 1.2% (-17.9% y/y). The cost of lead fell 1.9% in four weeks (-6.2% y/y). Offsetting these declines, aluminum prices increased 2.5% during the last four weeks (19.7% y/y). Tin costs rose 1.7% (19.3 y/y) while copper scrap prices improved 1.5% (9.5% y/y) over four weeks.

Textile prices eased 0.2% (-1.9% y/y) over the last four-week period. Cotton prices fell 1.3% (-18.8% y/y) and the cost of burlap held steady (+14.2% y/y) during the last four weeks.

The Foundation for International Business and Economic Research (FIBER) develops economic measurement techniques as applied to business cycles and inflation in the U.S. and other market economies. The commodity price data can be found in Haver's **DAILY**, **WEEKLY**, **USECON** and **CMDTY** databases.

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- Crude oil prices increase sharply.
- Lumber & rubber costs rise.
- Metals prices are mixed.

FIBER: Industrial Commodity Prices Strengthen in Latest Four Weeks

Robert Brusca

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**Assessments and expectations**
This ZEW survey for January shows mixed results. The economic situations in the euro area, Germany, and the United States, as currently perceived, improved month-to-month while expectations in the U.S. were essentially unchanged and economic expectations for Germany deteriorated. The U.S. had the largest increase in the assessment of the current economic situation. The U.S. diffusion reading rose by 9.1 points, the German situation improved by 2.7, points and in the euro area it improved by 1.2 points.

**Inflation expectations**
Inflation expectations rose in all three areas with the euro area seeing expectations rise by 9.1 points, Germany is seeing an increase of 9.7 points, and the U.S. experiencing an increase of 11.9 points. Given that, economic reports have been somewhat uneven, as you can see the assessment of the current situation has nonetheless improved. Along with that, inflation expectations are beginning to rise more or less across the board. Inflation is generally already above levels that central banks are targeting.

**Interest rates- short-term expectations**
Short-term rate expectations rose in the euro area by 12.5 diffusion points and by a whopping 32.6 diffusion points in the United States. With the election of Trump and expectations that there will be tariffs imposed, and tax cuts extended, and pro-growth policies implemented, there is a decided turn to the expectation for higher inflation and for that to create knock on effects for higher short-term interest rates. At the last policy meeting, the Federal Reserve cut its policy rate; the Federal Reserve is still looking for rate cuts sometime later in the year even though it's not looking to get back down to its inflation target this year, creating a somewhat strange perspective on Fed policy. Policy continues its inflation overshoot; yet, it continues to cut interest rates. I suspect we're on the cusp of seeing that policy change, but it has not changed yet. Here we see the ZEW experts seem to be on board for that policy undergoing some substantial changes in the months ahead.

**Long-term rate expectations**
Long-term rate expectations declined in Germany and in the U.S. and despite the outlook for somewhat higher inflation the outlook for higher short-term interest rates may be enough to mollify expectations on longer term rates and also may be a vote of confidence that central banks will do the right thing when inflation rises by raising short-term rates enough. This survey seems to conform the expectation to contain more distant inflation pressures and allow long-term rates to hold in.  

**Stock markets**
That view would be consistent with the stock market assessments that are lower in all three areas. In the euro area, the stock market assessment falls by 5.5 diffusion points; in Germany, it falls by 12.7 diffusion points; in the U.S., it falls by 1.8 diffusion points. That means that the ZEW financial experts are looking for stock market cap performance to back off despite better current economic conditions lowered expectations for Germany but not for the U.S. and in the midst of this expectation for higher inflation and substantially higher short-term interest rates as well. It's an interesting changing view from the ZEW experts and it paints a picture of the future that seems to be increasingly likely.

**Queue standings**
**U.S. queue standings-** The table also includes the queue standings for the various measures in the top part of the table. There we see only the U.S. has queue standings for some measures that are above 50% placing them above their longer-term medians (above 50% standings). Those are for the economic situation, for economic expectations and for stock market expectations. U.S. inflation expectations, however, are getting higher at 43.8%, closing in on their historic median, while short-term rate expectations are still relatively low at 13.2% and the level of long-term expectations in the U.S. is at 17.3% also relatively low.

**German queue standings-** Germany has an economic situation at its the 4.9 percentile standing - extremely weak. Expectations are better with the 35.6 percentile standing with inflation at the 22.7 percentile standing. The euro area short-term rate expectations (EC) are at 5.8% and the German long-term rate expectation is at 8.2%; both of those are low. The expectation for the German stock market is extremely poor with the 1.9 percentile standing.

**The euro area queue standings-** Compared to Germany, the euro area has a 24.9 percentile standing for the current situation. Inflation expectations are at a 20.6 percentile standing, with short-term rate expectations at a 5.8 percentile standing and stock market expectations in the eurozone around 8% still quite low.

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**Summing up**
Economic conditions continue to favor the United States in terms of current performance and expectations; along with that, U.S. inflation is expected to be higher as are U.S. interest rates compared to their historic norms. The U.S. stock market also suspected to outperform and to have above average results – yet, these are clearly still times where there's a great deal of stress. The German economy is under a great deal of pressure and the euro area is not far behind. Germany faces difficult times and political pressures internally. There are political changes going on across the spectrum with the most recent focus being on the U.S. with Donald Trump just having taken the oath of office and beginning to make significant policy changes immediately. We are likely to see further shifting in expectations as we get a chance to see what the Trump administration is going to do and as markets begin to handicap the effect they expect from those actions.

Germany

ZEW Expectations Are Mixed But Eco-conditions Still Weak

Tian Yong Woon

This week we focus on South Korea, where ongoing political uncertainty continues to weigh on the economy. The Korean won remains under pressure, and equities are struggling to mount a meaningful recovery (Chart 1). The political instability has also dampened both consumer and business sentiment (Chart 2), posing a risk to economic activity if the situation persists or worsens. Focusing on the manufacturing sector, recent PMI readings indicate that the economy has struggled to maintain expansion, suggesting that factors beyond political instability, including external pressures, have been contributing to the challenges (Chart 3). Despite these headwinds, the Bank of Korea (BoK) opted to hold interest rates steady last week, pausing its easing cycle for now, despite the aforementioned economic constraints (Chart 4). A closer look reveals both domestic and external factors likely influenced the BoK’s decision. Domestically, the interim political flux has certainly played a role. Externally, considerations include more muted market expectations of Fed rate cuts this year (Chart 5) and potential trade-related actions from the newly re-elected Trump administration (Chart 6).

**Impacts of recent political developments**
Political uncertainty continues to weigh heavily on South Korean financial markets, with the won remaining on the back foot after being the worst-performing Asian currency last year. The South Korean won has weakened significantly in recent months, particularly against the US dollar (Chart 1), depreciating by around 11% since early October. While the broader impact of a strengthening dollar has contributed to this decline, the won has been especially impacted by domestic political turmoil, notably following President Yoon's short-lived declaration of martial law last December. Although the currency saw some temporary relief after Yoon's impeachment and arrest, it has yet to mount a substantial recovery, reflecting ongoing instability in South Korea’s political landscape. Meanwhile, equities are still struggling to recover from last year's losses.  For context, Yoon declared martial law in early December of last year, accusing the main opposition party of engaging in "anti-state activities" and collaborating with "North Korean communists." This drastic decision followed months of Yoon's deep unpopularity, which some political commentators believe contributed to the opposition party's landslide victory in the parliamentary elections earlier that year. However, Yoon quickly rescinded the declaration just hours after it was made, following its overwhelming rejection by lawmakers and widespread public protests.


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The dampened sentiment surrounding South Korea is reflected not only in financial markets but also in recent business and consumer sentiment surveys, which have plunged amid political turmoil. Specifically, consumer sentiment dropped by over 12 index points in December 2024, marking the first negative sentiment reading in more than six months (Chart 2). Business sentiment also declined, though to a lesser degree, dipping further into negative sentiment territory during the period. While not yet fully reflected in hard economic data, sentiment indicators like those discussed above can often influence actual economic behaviour. As such, South Korea’s ongoing political instability risks adversely affecting economic activity, especially if it persists.

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Turning to other survey results, South Korea's latest PMI readings also showed deterioration in December. Specifically, the manufacturing sector slipped back into contraction, driven by declines in both output and new orders (Chart 3). However, it is important to note that South Korea’s manufacturing sector, as indicated by the PMI, has struggled to stay in expansionary territory for several months, suggesting that factors beyond recent political instability have been at play. In particular, external factors have been weighing on the manufacturing sector, a theme we will explore further below.

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**The Bank of Korea**
The Bank of Korea (BoK) surprised investors last week by keeping its policy rates unchanged, effectively pausing its easing cycle for now (Chart 4). This decision, taken despite the sentiment-dampening developments outlined earlier, is justifiable for two key reasons. First, on the external front, the BoK sought to avoid exacerbating downward pressure on the won, which could have been triggered by a widening of yield differentials had it opted for further rate cuts. Second, its cautious, wait-and-see approach amid ongoing domestic political uncertainty, allows the central bank to make more informed decisions once the political landscape stabilizes. However, one could argue that withholding further monetary easing could leave struggling sectors without the support they need. Given the ongoing uncertainties, the BoK has also indicated that South Korea’s GDP growth is likely to fall below its November forecasts of 2.2% for 2024 and 1.9% for 2025.

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Delving deeper into the external considerations mentioned earlier, the BoK has had to contend with a strengthening US dollar as markets increasingly scaled back expectations of further US Fed easing this year. The reduction in Fed rate cut expectations has pushed US yields significantly higher since his electoral victory last year (Chart 5). This, in turn, has made US yield differentials with other economies, including South Korea, less favourable. As a result, investor demand for the US dollar has increased, leading to sell-offs of other currencies, including the won. It is likely that the BoK took these yield differential considerations into account when deciding to hold its policy rate last week.

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Considerations regarding Fed policy are likely not the only concerns South Korea faces from the US. The potential direct impact of trade-related actions by US President Trump’s administration is also a significant worry. This is especially true given Trump’s hawkish stance on trade and his goal of reducing the US trade deficit through tariff-related measures. In this context, South Korea has particular reason for concern, as it recorded the 8th largest trade deficit with the US in 2023. This is concerning because exports have been a key driver—often the main driver—of South Korea’s recent GDP growth. Notably, the US has increasingly accounted for a larger share of South Korea’s exports, reaching just over 18% in 2024. In response, South Korean authorities have already begun considering measures, such as purchasing more oil and gas from the US, to help reduce the trade surplus with the US. However, it remains to be seen whether these actions will be enough to significantly reduce the surplus and avoid potential US countermeasures.

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Asia

Economic Letter from Asia: On Korea

Winnie Tapasanun

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Industrial production (IP) rose a larger-than-expected 0.9% m/m (0.5% y/y) in December following an upwardly revised 0.2% increase in November (-0.1% initially) and a downwardly revised 0.5% decline in October (-0.4% previously), data from the Federal Reserve Board showed. A 0.3% m/m December increase had been expected in the Action Economics Forecast Survey. The December IP index at 103.2 was the highest since June 2024; it was 4.2% above a low of 99.0 in September 2021 and 8.1% above a low of 95.5 in February 2021. The Fed estimated that increases in aircraft & parts output contributed 0.2 percentage point to December IP growth after the resolution of the Boeing strike. In Q4 2024, IP fell 0.2% q/q after falling 0.2% q/q in Q3 2024, dropping at a 0.6% annualized rate following a 0.8% Q3 annualized rate of decline. IP fell 0.3% in 2024 after rising 0.2% in 2023 and 3.4% in 2022.

By **industry groups**, manufacturing production gained 0.6% (0.03% y/y) in December following an upwardly revised 0.4% increase in November (+0.2% initially) and two consecutive m/m declines. Durable goods production rose 0.4% (-1.2% y/y) in December following a 0.9% rebound in November. This reflected m/m output rises of 6.3% (-5.6% y/y) in aerospace & miscellaneous transportation equipment, 1.7% (-1.9% y/y) in primary metals, 0.9% (-0.4% y/y) in fabricated metal products, and 0.5% (3.0% y/y) in electrical equipment, appliances & components. Notably, aircraft & parts production climbed 11.4% (-9.2% y/y), the largest m/m gain since May 2020, following a 0.7% November rebound. In contrast, the following durable goods categories fell m/m in December, including output drops of 2.0% (-3.7% y/y) in furniture & related products, 1.0% (-4.9% y/y) in miscellaneous durables goods, 0.7% (+3.8% y/y) in computer & electronic products, 0.6% (-5.7% y/y) in motor vehicles & parts, 0.6% (-1.3% y/y) in nonmetallic mineral products, 0.2% (+0.7% y/y) in machinery, and 0.2% (+2.7% y/y) in wood products.

Nondurable goods production rose 0.7% (1.4% y/y) in December after edging up 0.1% in November and October. The December rise reflected m/m output increases of all nondurable goods categories, including 1.6% (1.2% y/y) in petroleum & coal products, 1.5% (5.5% y/y) in printing & related support activities, 1.2% (-7.2% y/y) in apparel & leather goods, 0.8% (5.4% y/y) in chemicals, 0.6% (-1.0% y/y) in food, beverages & tobacco, 0.3% (1.3% y/y) in paper, 0.2% (-4.2% y/y) in plastics & rubber products, and 0.1% (2.3% y/y) in textiles & product mills.

Mining activity rose 1.8% (0.3% y/y) in December following an upwardly revised 0.5% decline in November (-0.9% initially). Utilities output rose 2.1% (4.3% y/y) following an upwardly revised 0.7% November drop (-1.3% initially). They increased for the second time in three months.

By **market groups**, business equipment output rose 1.4% (-4.3% y/y) in December following a 1.4% rise in November and two successive m/m decreases. Materials production advanced 1.2% (1.4% y/y) after virtually unchanged. Construction supplies production increased 0.9% (0.9% y/y) after holding steady. Consumer goods output rose 0.5% (0.3% y/y) in December after a 0.5% rebound, reflecting a 0.4% decline (-5.3% y/y) in durable consumer goods and a 0.7% gain (1.9% y/y) in nondurable consumer goods.

In **special classifications**, factory output of selected high-tech industries rose 1.1% (7.9% y/y) in December after holding steady in November (+0.3% initially) and four straight m/m rises. Manufacturing production excluding selected high-tech industries grew 0.6% (-0.2% y/y) following a 0.4% November rebound and two consecutive m/m declines. Manufacturing production excluding selected high-tech and motor vehicles & parts rose 0.7% (0.3% y/y) after a 0.2% November increase and three straight m/m decreases.

Capacity utilization rose to 77.6% in December, the highest since August, after holding at 77.0% in November (76.8% initially). The Action Economics Forecast Survey forecasted 77.0%. The December reading was 2.1 percentage points below its long-run (1972–2023) average. Manufacturing capacity utilization rose to 76.6% in December, the highest since September, from 76.2% in November (76.0% initially); the December rate was 1.7 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- Dec. IP +0.9% m/m (+0.5% y/y), up for the second straight month; IP Index at a 6-month high.
- Mfg. IP +0.6% m/m, w/ durable goods up 0.4% and nondurable goods up 0.7%.
- Mining activity +1.8% and utilities output +2.1%, up for the second month in three.
- Key categories in market groups all gain.
- Capacity utilization increases to a 4-month-high 77.6%.

No Clear Direction for the Japanese Economy in Recent Statistics

Summary

Louise Curley

More Economy in Brief

FIBER: Industrial Commodity Prices Strengthen in Latest Four Weeks

ZEW Expectations Are Mixed But Eco-conditions Still Weak

Economic Letter from Asia: On Korea

U.S. Industrial Production Exceeds Expectations in December

	Dec 06	Nov 06	Dec 05	M/M %	Y/Y%	2006	2005	2004
Industrial Production (2000=100)	109.5	108.7	104.9	0.74	4.39	105.9	101.6	100.0
Exports	161.7	154.0	147.21	5.00	9.84	145.70	127.10	118.42
Retail Trade	92.0	92.2	92.7	-0.22	-0.76	93.1	93.0	91.7
Family Living Expenditures	92.8	93.8	94.0	-1.01	-1.31	93.0	94.8	95.6
Employment (millions)	63.83	64.15	63.41	-0.50	0.66	63.83	63.57	63.29
Unemployment Rate (%)	4.1	4.0	4.4	0.1	-0.3	4.1	4.4	4.7