Artificial intelligence (AI) boom helps Asia-Pacific dodge a sharper slowdown, Moody’s Analytics said on Tuesday.
The rating agency said in a note The Asia-Pacific economy is running at two different speeds – the AI boom has helped the region dodge a sharper slowdown, but headwinds to growth keep mounting.
According to the note, geopolitical upheaval and trade disruptions — including the conflict in the Middle East and friction between the U.S. and its trading partners — have driven up prices and the cost of doing business, dragging down consumer and business spending across much of the region.
However, it noted the AI boom still drives the region’s export engine.
Hot demand for semiconductors and other tech products has lifted shipments across Taiwan (China), South Korea, Mainland China, and parts of Southeast Asia, offsetting weakness elsewhere. In the first half of 2026, nominal goods exports from South Korea and Taiwan topped Japan’s for the first time.
Having said that, strong exports mask trouble at home, said Moody’s.
Across much of the region, domestic demand sits below pre-pandemic trends and global averages, leaving growth exposed to any export slowdown, it said.
Higher energy and food prices add to the drag by raising inflation and reducing real incomes.
“Higher inflation strengthens the case for tighter monetary policy, especially where the AI boom has left growth hot and asset prices stretched,
“But the trade-offs facing central banks are difficult. Higher interest rates curb inflation by cooling demand,” said Moody’s,
It noted that approach worked when post-pandemic demand was running hot, but it is far less effective now, with demand already weak and rates still high across much of the region.
As a result, central banks have tightened policy only modestly this year.
Moody’s said choppy currency trading makes central banks’ jobs harder still.
Exchange rates have drifted badly out of line. The yen has fallen nearly 60 percent from early 2021, even though the rate gap with the rest of the world has narrowed, the current account surplus averages 5 percent of gross domestic product (GDP), and the fiscal position is strong.
It is noted that in late July, Washington and Tokyo stepped into the foreign exchange market to prop up the yen, their first joint action since 2011.
For Washington, propping up the yen is cheap insurance. The move supports demand for U.S. Treasuries, eases pressure on Asian currencies more broadly, and lets stretched positions
unwind slowly.
U.S. Treasury Secretary Scott Bessent and Japanese Finance Minister Katayama Satsuki said both countries stand ready to step in again if needed.
“We expect the Bank of Japan to add rate hikes to the effort,” said Moody’s.
According to Moody’s, the region’s growth will slow to 4.2 percent in 2026 and 3.6 percent in 2027, down from 4.3 percent in 2025, as higher prices and tighter policy bite into demand.
However, it sees developed Asia bucks the trend. In Taiwan and South Korea in particular, the AI boom will accelerate growth in 2026.
The conflict in the Middle East will eventually wind down, so the spike in inflation should prove temporary, said Moody’s.
Even so, it said several APAC central banks look set to tighten a little more, and the Bank of Japan and the Bank of Korea among them.
“A longer spell of high oil prices could put still more tightening on the table,” it added.
For now, it opined that the AI boom is still propping up export growth, but it is looking increasingly ripe for a pause.
“Prices across a range of electronics have surged. Isolated shortages in several hardware lines have jolted consumer markets in what analysts call the ‘RAMpocalypse’, a reference to random access memory shortages,
“Investor euphoria has driven equity valuations to record highs,” it noted.
With the AI boom papering over the strain from higher inflation and tight policy, Moody’s also noted that the risks facing the baseline forecast tilt firmly to the downside, with geopolitics tops the list.
According to the rating agency, the Middle East conflict is a top concern.
It is noted that in mid-June, the U.S. and Iran announced a ceasefire and a memorandum of understanding, halting the fighting and reopening the Strait of Hormuz.
Shipping picked up temporarily. But by mid-July, that fragile peace had collapsed. Fighting resumed, and the traffic through the waterway slowed sharply again.
Houthi forces struck Saudi tankers and energy sites along the Red Sea, widening the conflict.
“A fresh flare-up in the Middle East or a drawn-out blockade of the Strait of Hormuz would send oil prices surging and force countries to drain their reserves,
“That would lift inflation, hurt growth, and worsen the trade-offs facing central banks,” said Moody’s.
It said the conflict also threatens to puncture the AI boom.
“Even before fighting broke out, doubts had emerged over the long-term profitability and viability of AI business models,” said Moody’s.
Higher energy prices and tighter financial conditions drive up operating costs and interest rates, reinforcing those doubts, it added.
It also said a drawn-out conflict would pile serious strain on the economics behind AI investment.
According to Moody’s trade tensions are an ever-present risk.
In July, Washington unveiled fresh tariffs on 60 U.S. trading partners under Section 301 of the Trade Act of 1974, targeting economies that failed to ‘impose and effectively enforce a prohibition on the importation of goods produced with forced labor’.
The levies run from 10 percent to 12.5 percent and replace the tariffs under Section 122 of the Trade Act of 1974.
A long list of carve-outs applies, covering semiconductor chips and car parts that would cause economywide disruption in the U.S.
“For Asia, where most of the world’s export surpluses sit, this means that effective tariff rates largely fall from where they sat at the start of the year, before February’s U.S. Supreme Court ruling struck down the tariffs the White House had imposed under the International Emergency Economic Powers Act of 1977,” said Moody’s.
It noted that China’s effective rate edges up to 23.4 percent from 21.3 percent under the stopgap regime, still shy of the 29.7 percent it faced before the court stepped in.
With President Xi Jinping due to visit the U.S. in September and both sides floating reciprocal tariff cuts, it said tariffs now look like a fixture of trade rather than a passing phase.
According to Moody’s, financial markets add to the unease. Equity valuations look stretched, bond markets are jittery, and exchange rates have drifted badly out of line with fundamentals.
“All up, the Asia-Pacific region has proven more resilient than expected, but challenges are mounting,
“A prolonged conflict in the Middle East, a sudden bursting of the AI boom, fresh trade friction, or a financial market correction alongside a global downturn would leave the region badly exposed,” it said.