Given the strong trade connections between Asian economies and the U.S., a slowdown in the U.S. macroeconomic environment could significantly impact external demand, which has been a cornerstone of Asian growth since 2002. Sentiment is a crucial channel through which industrial policies, such as tariffs, affect economic activity. Similar to the closely monitored sentiment indicators in the U.S., understanding how Asian corporate and consumer sentiment has evolved in response to factors like trade tensions, inflation expectations, and domestic political unrest is essential for assessing the risks to near-term growth trajectories.

Asian corporates growing cautious

Asia's upstream position in the global goods sector's value-added chain highlights the importance of manufacturing surveys like the Purchasing Managers’ Index (PMI). Initial reports on the Asian goods sector appeared to be thriving in April, with rising sentiment in major markets like China and Japan. However, Taiwan and Korea reported their second and third consecutive months of contraction in the headline manufacturing PMI readings, respectively, with broad-based reductions in output and future output suggesting potential production challenges in the second half of 2025.

To delve deeper, we examined the PMI orders-to-inventories ratio, which reflects the relationship between goods demand and the manufacturing inventory cycle. A higher ratio indicates a greater demand for goods relative to stock levels, potentially leading to increased future production to meet rising demand. In Korea and Taiwan, the PMI order-to-inventory ratio had been in sharp decline over the last two months, indicating lower upcoming demand for finished goods and relatively higher inventory levels, as corporates front-load ahead of the Liberation Day tariffs. Notably, there is a strong correlation between the Asian PMI orders-to-inventory ratio and corporate profits, implying that a de-escalation around tariffs could be a tailwind for corporate profits (Exhibit 1). While Japan's direct impact from higher tariffs is relatively limited compared to its regional peers, the sentiment channel could significantly affect growth. 

Widely cited corporate surveys in Japan, such as the Tankan survey last month, highlighted caution among large Japanese firms. This aligns with the April Economy Watchers Survey, a sentiment tracker for small and medium enterprises in Japan, which fell to its lowest level since February 2022.

Asian consumers await fiscal support

Consumer sentiment in Asia remains sluggish as domestic factors such as an erosion in purchasing power and political uncertainties have weighed on consumer confidence in recent quarters. For instance, consumer confidence in Thailand hit a 7-month low in April, in part owing to stagnating purchasing power and elevated household debt. In Korea, domestic political uncertainties and a slowdown in the construction cycle, which affected services-related activities, likely dampened consumer sentiment (Exhibit 2). Looking ahead, political noise has decreased, and the labor market is improving following a sudden rise in the unemployment rate at the end of 2024. To address growing downside risks, particularly as external headwinds loom large, Korea's fiscal policy is likely to become more accommodative to support domestic demand. In Japan, consumer sentiment has been impacted in recent years due to prolonged real income declines, with March's reading reaching a two-year low. The drag on personal consumption will be offset by the recent passage of President Ishiba’s national budget, with the potential for a supplementary fiscal package.

Monetary easing gains momentum

Asian monetary policies are increasingly adopting a supportive stance amid rising external uncertainties. Inflation has remained within or below target ranges for an extended period in many Asian markets. However, weak exchange rates against the U.S. dollar have limited central banks from implementing more substantial interest rate cuts. Nonetheless, as the risks of tariff-induced economic slowdowns intensify, Asian central banks have shifted to a more accommodative stance in recent weeks. In China, a comprehensive monetary stimulus package, including interest rate cuts, reserve requirement ratio reductions, and other liquidity injections, underscores its focus on stimulating domestic growth and countering external downside risks. Similarly, India, the Philippines, and Thailand, have resumed their easing cycles and provided explicit forward guidance, indicating more interest rate cuts in the coming months to support economic activity. Singapore has also adjusted its currency policy, effectively easing its monetary policy. Even in Indonesia and Korea, where interest rates remained unchanged in their last meetings due to prioritizing currency stability, communications have signaled a higher willingness and preparedness to ease monetary policies should external economic risks worsen. With the U.S. dollar declining by nearly 9% since its January peak, according to the DXY index, pressure on Asian currencies has reduced, allowing domestic central banks to pursue further monetary easing.

Investment implications

The recent shift towards more accommodative monetary policies across Asia, coupled with fiscal measures, suggests a supportive environment for domestic growth. This is likely to boost consumer and corporate sentiment, providing a buffer against external shocks, such as tariff-induced economic slowdowns. The final outcome on trade policies is expected to remain uncertain for a prolonged period, as negotiations between the U.S. and Asian economies continue. Consequently, this marks a pivotal point for Asian markets, where domestic demand could play a larger role in driving growth. The historical resilience of Asian equity markets during periods of fiscal stimulus offers a compelling case for diversification. 

While U.S. equities remain a key component of portfolios, investors may want to consider diversifying exposure with Asian equities, particularly in sectors poised to benefit from domestic consumption and fiscal support, to enhance portfolio resilience against global uncertainties.

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