Asia week ahead: Rate decision in South Korea and inflation data in Japan

The Bank of Korea is likely to keep its policy rate at 2.5% as inflation remains near 2% and financial instability persists. We believe the rate-cutting cycle ended last year, and the BoK will avoid suggesting possible hikes. Exports are likely to improve even more strongly, and a consumption recovery is expected – although given rising debt, the services burden, and slow recoveries in construction, a neutral stance from the BoK should help ease concerns about sudden rate hikes. Meanwhile, survey data – both consumer and business – should improve further on the back of strong local equity performance and an optimistic view on the IT sector.

Next week will see a busy data calendar in Japan. While fourth-quarter GDP recovery was below expectations, we expect monthly activity figures to show a strong rebound. Industrial production and retail sales are likely to increase significantly in January, aided by fiscal spending and solid winter bonuses. Meanwhile, Tokyo's CPI inflation is expected to ease further as energy, utility, and food prices soften. Core inflation excluding fresh food should fall below 2%, which will allow the Bank of Japan to maintain its current 0.75% rate at the March meeting.