January’s seasonally adjusted Nomura/JMMA Japan Manufacturing PMI remained below the critical 50.0 threshold that separates contraction from expansion for the eleventh consecutive month in January to indicate a further worsening of operating conditions in the Japanese manufacturing sector. Moreover, the headline index recorded its lowest level since the inception of the series in October 2001, posting 29.6, down from 30.8 in December.

January data indicated that production at Japanese manufacturers declined at the most marked rate in the survey history. The latest contraction reflected rapidly deteriorating market conditions as economic uncertainties continued to mount amid fears of a prolonged downturn.

In January, volumes of new orders placed with Japanese manufacturers contracted at the second sharpest rate recorded by the series to date, with anecdotal evidence suggesting that the deteriorating health of the global economic environment had principally contributed to the latest decline. Furthermore, new orders from abroad contracted at the fastest pace in the series history.

Firms attributed this to a severe reduction in global demand, reflecting the continuing weakness seen in the economies of Europe and the U.S.

The rate of input price deflation accelerated to its strongest since December 2001 in January. A number of firms cited higher raw material and petroleum prices as significant contributors to cost deflation.

Prices charged by Japanese manufacturers fell for the second straight month in January. Moreover, the rate of output price deflation was the most marked since July 2003. The survey panel widely commented that lower input costs helped alleviate pressure on operating margins allowing for price reductions to be implemented over the course of the month

A further sharp reduction in new orders in January allowed firms to complete volumes of outstanding business at the most marked pace in the survey history. Backlogs of work have fallen in each of the past twelfth months.

Employment at Japanese manufacturers declined for the sixth successive month in January, as firms reacted to current economic instability by cutting jobs at the fastest pace in seven years. Panellists also signalled that the lack of new work was a key factor contributing to the latest decline.

Finally, in line with sharp falls in new work and lower output requirements, input buying by Japanese manufacturers declined at a series record pace in January.

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said: “Japan's current recession is unfolding more rapidly than previously projected. The Japanese economy's precipitous downshift is attributable to an unexpected and rapid deterioration in overseas economies as strongly suggested by the recent decline in the PMI, which also indicates that production in the manufacturing sector is highly correlated with exports. Moreover, the main contributor to the slump in the manufacturing sector seems to be the transportation equipment sector.

The Nikkei reported on 24 January that major Japanese automakers estimated aggregate 09Q1 domestic production of around 1.7mn passenger cars, down around 40% y-y, indicating that the transportation equipment sector is being forced to slash output. Production activity in the overall manufacturing sector looks set to remain sluggish in 09Q1.”