Asia Intelligence Brief for Friday, February 20, 2026

Critical

Tense

Watching

Japan’s headline CPI dropped to 1.5% in January — the sharpest deceleration in four years — ending a 45-month streak above the BOJ’s 2% target. Core CPI matched forecasts at 2.0%, while the core-core measure (excluding fresh food and energy) came in at 2.6%, slightly below expectations of 2.7%. Food inflation eased to a 15-month low as the rice price surge that had driven consumer anger through 2025 finally started to unwind.

The timing is awkward for the BOJ. Markets had priced an April rate hike to 1.0% with 80%+ probability heading into the week, but this print forces a recalibration. The central bank itself anticipated the dip — its January outlook projected inflation would fall below 2% in H1 2026 — and upgraded FY26 core and core-core forecasts. The crucial question is whether Takaichi’s food tax suspension pledge (an 8% tax freeze for two years) artificially compresses the near-term path, masking underlying wage-price momentum that the BOJ sees as durable.

Adding complexity: flash February PMI data released Friday showed manufacturing activity surging to 52.8, the strongest reading since May 2022, with export orders growing at the fastest pace in eight years. The disconnect between softening consumer prices and accelerating factory output creates a communication challenge. The yen weakened past 155 post-data, approaching the intervention zone — if USD/JPY hits 160, MOF action becomes a live risk.

The first concrete tranche of Japan’s $550 billion US investment commitment materialised this week with $36 billion in projects. The centrepiece is SB Energy’s $33 billion, 9.2-gigawatt natural gas facility near Portsmouth, Ohio — if completed, the world’s largest gas-fired power plant, capable of powering 7.4 million homes. Hitachi and Toshiba will supply turbine and grid-integration technology. A $2.1 billion deepwater crude export terminal in Texas and a synthetic diamond plant in Georgia round out the initial slate.

The deal structure reveals the new rules of US trade diplomacy. Japan’s $550 billion commitment was secured against the threat of 25% blanket tariffs; the actual rate was negotiated down to 15%. Only 1–2% of the total is direct cash investment — the rest flows through loans and guarantees from JBIC and NEXI. If Japan declines to fund a selected project within 45 business days, the US retains the right to claw back revenues or reimpose tariffs.

For Asia, the implications are threefold. First, the AI energy race is now a geopolitical infrastructure play — SoftBank’s Stargate project with OpenAI is the demand driver. Second, the tariff-for-investment model is replicable; South Korea, India, and ASEAN should expect similar frameworks. Third, Japan’s industrial champions — Hitachi, Toshiba, the trading houses — are positioning as the hardware backbone of America’s AI buildout.

The Kospi closed at 5,808.53 (+2.31%), its second consecutive all-time high, driven by a dual catalyst: the semiconductor supercycle and the Iran-driven defence bid. SK Hynix surged 6.15% on continued AI and high-bandwidth memory demand. Hanwha Aerospace jumped 8.09% as Trump’s 10-day Iran decision window concentrated buying in defence names across the region.

Goldman Sachs maintains its 120% Korean earnings growth forecast for 2026 and says it remains too early to reduce positions. The Kospi has now surged roughly 5% in two sessions since the Yoon verdict provided political clarity. But the rally is narrowing — the Kosdaq closed essentially flat at 1,106, with risk appetite concentrating in mega-cap semis and defence. The Korea–India divergence from Thursday reversed Friday as India’s PMI data lifted the Sensex, but the structural split remains: Korea is the semiconductor play, India is the domestic demand play, and the oil price determines which outperforms on any given session.

India’s composite PMI surged to 59.3 in February, the highest since November, as manufacturing output accelerated sharply to 57.5 from 55.4 in January. Export orders grew at the fastest pace since August 2025, and hiring improved across both manufacturing and services. Input costs hit a 15-month high, however, and selling prices reached a six-month peak — a signal that pass-through inflation is building.

The Sensex recovered 0.40% to 82,831 after Thursday’s 1.48% crash, with NTPC (+2.7%), L&T (+2.4%), and HUL (+1.7%) leading. The data provided the domestic demand counterweight to the oil-driven geopolitical anxiety.

Separately, the five-day AI Impact Summit in Delhi-NCR concluded Friday with the signing of the India–US “Pax Silica” declaration — a bilateral framework for AI cooperation, semiconductor supply chains, and joint research. US Ambassador Sergio Gor called India’s resolve “breathtaking.” This is the latest in a series of US–India technology alignment moves that are reshaping the region’s semiconductor geography.

The State Department released fresh intelligence on February 17 alleging that China conducted a yield-producing nuclear test at its Lop Nur facility in June 2020, using a technique called “decoupling” — detonating a device inside a large cavity to mask the seismic signature. A magnitude 2.75 event was detected by a monitoring station in Kazakhstan. Assistant Secretary Christopher Yeaw said there was “very little possibility that it is anything other than an explosion.”

The allegations are contested. The CTBTO said its data alone was insufficient to confirm a test. Independent experts at NORSAR echoed the caution. China denied the claims, accusing Washington of political manipulation. But the strategic context matters more than the evidentiary debate: New START expired on February 5, leaving no binding nuclear arms control framework for the first time since the Cold War. China is expanding from roughly 200 warheads toward 1,000 by 2030, and Trump has signalled the US will resume testing “on an equal basis.”

For Asia, this is the missing piece of the security puzzle. The South China Sea confrontation — where the US, Australia, and Philippines just completed trilateral naval drills that drew Chinese combat readiness patrols — now operates against a backdrop of nuclear escalation. Beijing deployed air and naval forces in response to the February 15–16 exercise inside the Philippine EEZ, while the Philippines rebuked the Chinese embassy for “coercive” threats linking economic cooperation to maritime disputes. Manila, as 2026 ASEAN chair, is pushing code-of-conduct talks to monthly meetings. The nuclear dimension adds a ceiling to how far conventional confrontation can escalate — but also raises the stakes if miscalculation occurs.

Chinese and Hong Kong markets remain closed through the extended Spring Festival, with the Shanghai Stock Exchange not reopening until Tuesday, February 24. When they do, they absorb a week of accumulated shifts: oil above $71 on Iran escalation, the yen past 155, Indonesia’s governance crisis deepening, and Korea surging to records.

Pre-holiday, authorities had moved to rein in leverage after margin trading balances hit all-time highs. Standard Chartered’s Raymond Cheng remains positive on A-shares, projecting mid-teen earnings growth and expecting fiscal support at the NPC/CPPCC “Two Sessions” in March. The PBOC LPR decision, expected when markets reopen, is consensus hold at 3.0%/3.5%.

The reopen will test whether the China rotation narrative — which has driven APAC +11% YTD versus a flat S&P 500 — has legs beyond the liquidity vacuum. The steel overcapacity wall continues to grow, with Brazil’s $670/t anti-dumping duties the latest barrier, and redirection flows concentrating on ASEAN markets with weaker trade defences.

Friday delivered the clearest illustration yet of how three forces — semiconductors, geopolitics, and monetary policy — are pulling Asia in different directions simultaneously.

Japan’s CPI plunge below 2% for the first time in nearly four years arrived on the same day its flash manufacturing PMI hit the strongest level since May 2022. The BOJ now faces a communication puzzle: consumer prices say wait, factory output says go, and Takaichi’s fiscal expansion pledge (food tax freeze, AI investment, shipbuilding) argues for tightening before the fiscal impulse hits. The yen weakened past 155, approaching the zone where MOF intervention becomes a live risk. The $33 billion Ohio gas plant — the first concrete delivery under Japan’s $550 billion US commitment — confirms that Tokyo has chosen to pay the tariff premium and embed itself as the hardware backbone of America’s AI buildout. This is not aid; it is strategic positioning, with Hitachi, Toshiba, and SoftBank converting a trade threat into an infrastructure franchise.

Korea continues to demonstrate that the semiconductor supercycle trumps everything else in the near term. The Kospi’s second straight record, driven by the SK Hynix–Hanwha Aerospace axis, reflects a market that has absorbed the Yoon verdict and is now pricing pure momentum. Goldman’s 120% earnings growth forecast provides the fundamental backing, but the rally is narrowing — mega-caps only — and any semis disappointment would reprice violently.

The week’s most consequential development for Asia’s long-term security architecture may be the US allegation that China conducted a secret nuclear test in 2020 — contested by the CTBTO and denied by Beijing, but deployed as justification for resuming American testing after New START’s expiry. China’s expansion toward 1,000 warheads by 2030 adds a nuclear overhang to every other flashpoint in the region, from the South China Sea — where trilateral US/Australia/Philippines drills this week drew Chinese combat readiness patrols — to Taiwan and the Korean Peninsula. India’s PMI surge and the Pax Silica signing are the structural story underneath: domestic momentum accelerating, and the US–India technology alignment now formalised. When Chinese markets reopen next Tuesday, they absorb all of this at once. The rotation holds — APAC continues to outperform the S&P 500 — but the story within Asia is increasingly about which structural bet you own.