Japan‘s manufacturing sector is starting to splutter

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  • Activity levels across Japan’s manufacturing sector improved at the slowest pace since late 2016 in July.
  • New export orders fell for a second month while new domestic orders were largely unchanged, hinting the slowdown may persist in the months ahead.
  • Input prices surged, thanks in part to supply-chain disruptions, adding to margin pressures.

Japan’s manufacturing sector is starting to splutter, expanding at the weakest pace in over a year during July.

The Nikkei-IHS Markit Japan “flash” manufacturing Purchasing Managers Index (PMI) fell to 51.6, down from 53.0 in June, the slowest improvement seen in 20 months.

This PMI measures perceived changes in activity levels across Japan’s manufacturing sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests that they’re deteriorating. The distance from 50 indicates how quickly activity levels are expanding or contracting.

The flash reading, released one week before the final PMI report, is based off around 85-90% of survey responses and is generally a pretty accurate guide as to how the final figure will print.

So based on preliminary estimates, while activity levels still improved in the latest survey, it wasn’t by much.

As seen in the table below from IHS Markit, and mirroring the headline PMI, most of the survey’s activity subindexes either slowed or outright deteriorated in July, except for inflationary pressures.

IHS Markit

Growth in output, employment, inventories and purchase quantities all slowed, while order backlogs declined, suggesting that softening demand allowed firms to eat into outstanding orders.

Hinting that the slowdown in July may extend in the months ahead, new export orders continued to decline while new domestic orders were almost unchanged, growing at the slowest pace since September 2016.

The only components to register a stronger reading compared to June came from input and output prices which continued to rise on the back of supply disruptions, potentially due to increased trade tensions between the United States and China.

“Slowing demand presents a worrying development given input delivery times lengthened to the sharpest extent in over seven years,” said Joe Hayes, Economist at IHS Markit.

“Supply chain difficulties reportedly contributed to the fastest rate of input price inflation in since March 2011.

“Although output prices were raised at a relatively notable pace, the rate of increase was far weaker than that of costs, implying profit margin erosion.”

Given that combination, it was little surprise that optimism among respondents looking one year ahead deteriorated, albeit most remained positive in the latest survey.

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