Asian Stocks Hit New Highs as US Risks Mount

South Korea's central bank is widely expected to keep its key interest rate unchanged at 2.50% this week, as a falling currency and persistent inflation limit its room for further monetary easing.

A Reuters poll of 34 economists conducted from January 6 to 12 found a unanimous consensus that the Bank of Korea (BOK) will hold its base rate steady on January 15. The forecast signals a significant shift, with analysts now pushing expectations for the next rate cut into early next year.

Currency and Inflation Pressures Mount

A primary driver behind the BOK's cautious stance is the Korean won, which has weakened by nearly 2% in the first two weeks of the year. This depreciation increases the risk of higher consumer prices, a concern the central bank flagged at its November meeting.

While inflation in Asia's fourth-largest economy eased slightly to 2.1% in 2025 from 2.3% in 2024, it remains above the BOK's official 2% target, complicating any decision to lower borrowing costs.

BOK Signals an End to Its Easing Cycle

The central bank has also adjusted its forward guidance, signaling it may be nearing the end of its current easing cycle. The language has shifted from a commitment to "maintain its rate cut stance" to a more data-dependent approach, strengthening the case for a prolonged pause.

This outlook is reflected in the sharp reversal of market expectations. In a November 2025 poll, over 60% of respondents predicted at least one additional rate cut in the first quarter of this year. In the latest poll, that number has plummeted to just 22%, or seven of 32 respondents. The survey now indicates no rate changes are expected through the end of 2026.

Expert View: FX Volatility and Housing Prices Are Key

Analysts point to twin pressures from the currency market and the domestic property sector.

"Given the volatility in the FX market, it is too soon for the BOK to cut rates right now," said Kelvin Lam, senior economist at Pantheon Macroeconomics.

He added that the BOK's focus has turned to stabilizing the won and addressing risks from the property market. "The focus for the BOK is now turned to having a stable currency and also looking at instability stemming from the overheating apartment prices," Lam noted.

Seoul's Property Market Heats Up

Data from the Korea Real Estate Board underscores the challenge facing policymakers. Apartment prices in Seoul rose by 0.18% in the week ending January 5 alone. Over the course of 2025, prices climbed a steep 8.7%, fueling concerns about financial stability.

South Korea's Broader Economic Outlook

Despite the policy constraints, economists forecast South Korea's economy will expand by 2.0% this year, slightly ahead of the BOK's own projection of 1.8%. Growth is expected to hold steady at 1.9% in both 2027 and 2028.

Inflation for the current year is projected to average 1.9%, just below the central bank's forecast of 2.1%.

Japanese government bonds sold off on Tuesday as rising political uncertainty put investors on edge about the country's fiscal direction.

The market showed clear signs of stress, with the 30-year bond yield climbing by as much as 12 basis points to 3.52%. At the same time, 10-year bond futures dropped by as much as 71 ticks.

Political Jitters Drive Market Moves

The sell-off was fueled by growing speculation that Prime Minister Sanae Takaichi might dissolve parliament and call a snap election.

Investors are concerned that a stronger electoral mandate for Takaichi would empower her to push forward with an expansionary fiscal agenda. Such a policy would likely put downward pressure on both government bonds and the yen.

Yen Hits One-Year Low Before Rebounding

The Japanese yen also reacted sharply to the political news. The currency initially weakened past 158 per dollar, marking its lowest point in a year. This slide came after media reports highlighted the possibility of an early election.

However, the yen later recovered, gaining as much as 0.2% to trade at 157.90 per dollar. The reversal followed a meeting in Washington where Japan's Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent expressed shared concerns over the yen's weakness.

The currency's performance has been a persistent issue. Last year, the yen lagged most of its Group of 10 peers, managing only a 0.3% gain against the US dollar. In response to its recent slide, Japanese officials have intensified their warnings against speculative trading, and markets are now on alert for potential government intervention to support the currency.

Japanese Prime Minister Sanae Takaichi will meet with South Korean President Lee Jae Myung on Tuesday in a high-stakes summit aimed at strengthening ties as both nations navigate a complex diplomatic landscape dominated by China. The meeting is a strategic move by Tokyo to counter Beijing's increasing efforts to drive a wedge between key U.S. allies in the region.

A Strategic Meeting to Counter Beijing

This summit, held in Takaichi's home prefecture of Nara, marks the second time the two leaders have met in less than three months. Their first in-person discussion occurred in late October on the sidelines of the Asia-Pacific Economic Cooperation (APEC) conference, where they agreed to work toward a stable, forward-looking relationship.

While Japan-China frictions are expected to be a central topic, President Lee is unlikely to make any public statements critical of Beijing. His administration has carefully sought to avoid taking sides in the escalating tensions between South Korea's two most powerful neighbors.

Japan's Push for Allied Support

Even without direct mention, China's influence will loom large over the discussions. Relations between Tokyo and Beijing have deteriorated significantly since Takaichi’s first meeting with President Xi Jinping at the APEC summit. In early November, her remarks concerning Taiwan angered China, which retaliated with stricter export controls on Japan and issued a travel advisory.

A successful meeting with South Korea would bolster Japan's broader strategy to build a coalition of allies to push back against what it sees as China's global campaign to isolate Tokyo. This effort includes:

• Finance Minister Satsuki Katayama holding talks with other advanced economies to secure critical mineral supply chains, amid fears China could leverage its dominance in rare earths.

• Defense Minister Shinjiro Koizumi scheduling talks with his U.S. counterpart for Thursday.

Seoul's Diplomatic Tightrope Walk

For President Lee, the summit represents another step in a delicate diplomatic balancing act. Just last week, he was in Beijing, where he was warmly received by President Xi, who even referenced the two countries' shared history of opposing Japanese militarism.

Lee has signaled a more balanced foreign policy than his predecessor, who prioritized a closer alliance with the United States. However, South Korea's foundational security alliance with the U.S. places a natural limit on any significant strategic shift toward China.

China's Divergent Stances on Japan and Korea

Beijing's recent actions highlight its contrasting approaches to its two neighbors. While courting South Korea, it has adopted an increasingly confrontational stance toward Japan. China has imposed new export restrictions on dual-use goods that could enhance Japan's military capabilities and launched an anti-dumping probe into a key material used in chipmaking. Furthermore, Japan recently lodged a protest over China's deployment of a mobile drilling vessel in the East China Sea.

Political Stakes for Prime Minister Takaichi

Prime Minister Takaichi has refused to retract her November remarks suggesting Japan could deploy its military if China were to invade Taiwan, despite repeated demands from Beijing. While the diplomatic and economic consequences continue to grow, the situation has not yet harmed her domestic popularity.

This has fueled speculation that Takaichi may call a snap election in February to strengthen her coalition's hold on power. Following their talks, Takaichi and Lee are expected to speak to reporters on Tuesday afternoon before visiting a historic temple on Wednesday. Later in the week, Takaichi is scheduled to host Italian Prime Minister Giorgia Meloni in Japan.

President Donald Trump announced Monday that his administration is working with major technology companies to ensure the massive utility costs from their data centers do not lead to higher household electricity bills.

In a statement, Trump said his team is starting with Microsoft, which he expects will make "major changes" beginning this week to address the issue.

Microsoft First in Line as White House Targets Power Costs

Trump's initiative aims to force tech companies building AI infrastructure to internalize their energy expenses rather than passing them on to the public.

"I never want Americans to pay higher Electricity bills because of Data Centers… the big Technology Companies who build them must 'pay their own way,'" Trump stated in a social media post.

He added that the collaboration with Microsoft is intended to ensure Americans don't "pick up the tab" for the company's power consumption. While promoting the construction of more data centers as crucial for maintaining U.S. dominance in artificial intelligence, Trump also criticized political rivals for allegedly driving up utility costs for consumers.

The Soaring Energy Demands of the AI Boom

The president's focus on data centers stems from the immense energy and water resources they require. Training and operating the large language models that power the AI industry demand enormous computational power, raising concerns across the political spectrum that the average American could face higher utility bills.

These worries have grown as Wall Street's "AI hyperscalers"—a group of megacap companies investing billions in the technology—have laid out plans to build and operate a large number of new AI data centers across the United States.

A Political Pivot Ahead of Midterm Elections

This new policy direction marks a change for the Trump administration, which was previously seen encouraging the expansion of data centers through 2025 with faster approvals and more relaxed regulatory demands.

However, with midterm elections on the horizon, Trump appears to be targeting lower living costs for Americans in an effort to bolster his political standing.

China and Southeast Asian stock markets are poised to lead Asia in 2026, according to a new analysis from Deutsche Bank. The bank's strategists predict a "bull upcycle" for China, driven by a powerful combination of supportive liquidity, recovering corporate profits, and a decisive government policy pivot toward reform.

Three Core Catalysts for Chinese Equities

Deutsche Bank identifies three fundamental factors that could fuel sustained growth in China's market. These elements suggest a structural shift that could improve both investor sentiment and corporate performance.

A Reservoir of Household Cash

While the pace of global liquidity growth is slowing, China has a unique internal advantage: vast household bank deposits. Analysts believe this cash could increasingly flow into equities as the opportunity cost of holding savings in low-yield accounts diminishes.

A Focus on Corporate Profitability

A key driver for improved corporate health is the government's "anti-involution" policy, designed to curb the excessive competition and oversupply that have plagued many industries. Deutsche Bank notes that signs of greater investment discipline are already emerging, helping profits stabilize after years of pressure from overcapacity.

Additional support comes from industrial policies and directives for state-owned enterprises to speed up their payment cycles, which is expected to bolster corporate sentiment.

A Policy Pivot Toward Reform

A broader shift in Beijing's priorities is also expected to lift confidence through 2026. The government's work plans and the upcoming 15th Five-Year Plan show an increased emphasis on boosting consumption, investing in human capital, and easing regulatory pressures. This move toward reform and "opening up" signals a more market-friendly environment.

The Global Investor Factor

Deutsche Bank argues that global investors are currently underweight on Chinese assets. This positioning creates significant upside potential. The bank estimates that if major funds were to reallocate just one percentage point of their portfolios to China, it could trigger approximately $270 billion in capital inflows.

When combined with potential global fiscal easing and interest rate cuts, this influx of capital could propel Chinese and Hong Kong equities beyond their previous market peaks.

Deutsche Bank's Market Recommendations

Based on this outlook, the bank's strategy is clear:

• Favored Markets: China and select Southeast Asian markets.

• Favored Sectors: Industries benefiting from "anti-involution" policies that reduce over-competition.

• Areas of Caution: High-tech sectors that are facing renewed supply pressures.

Australian consumer confidence soured in January, with households growing increasingly concerned about their finances as the prospect of higher interest rates looms.

Westpac Survey Reveals Widespread Pessimism

A survey from Westpac Banking Corp. on Tuesday showed that overall sentiment fell by 1.7% to 92.9 points. With the index remaining below the neutral 100-point mark, pessimists continue to outnumber optimists.

"The main catalyst continues to be a sharp turn in interest rate expectations," said Matthew Hassan, Westpac's head of Australian macro-forecasting. He noted that nearly two-thirds of consumers now anticipate mortgage rates will climb over the next year, a figure that has more than doubled since September.

The survey's sub-indexes painted a uniformly bleak picture. "All sub-indexes were below 100, only the second time since October 2024 that pessimists have outnumbered optimists across every component," Hassan added.

RBA's Hawkish Stance Fuels Mortgage Worries

The growing anxiety among consumers reflects the messaging from the Reserve Bank of Australia (RBA). The central bank has held borrowing costs steady at 3.6% since August but has consistently warned about persistent inflation pressures in a tight job market.

RBA Governor Michele Bullock has indicated that further policy easing is unlikely in the near term, suggesting the next move is more likely to be a rate hike than a cut.

Mixed Signals: Spending Rises Amidst Growing Concern

This drop in sentiment contrasts with recent official data showing that Australian household spending grew faster than expected in November. The increase was driven by spending on services and strong pre-Christmas retail discounts.

The disconnect has left economists divided. Forecasters at Commonwealth Bank of Australia and National Australia Bank are predicting at least one more rate increase this year to combat inflation. In contrast, analysts at Bank of America expect the RBA to keep rates on hold. Meanwhile, money markets are pricing in a rate hike by mid-2024.

Key Data to Watch Ahead of RBA Meeting

The RBA's next policy decision at its February 2-3 meeting remains uncertain and will be heavily influenced by upcoming economic reports.

Policymakers will be closely watching December's employment figures to assess the labor market's tightness. The fourth-quarter inflation data, scheduled for release in late January, will also be a critical factor in shaping interest rate expectations.