Source: Markit Economics

May Japan PMI data pointed to another month in which the Japanese manufacturing sector contracted. However, the seasonally adjusted headline Purchasing Managers’ Index (PMI) rose sharply to 46.6, from 41.4 in the previous month, pointing to the slowest deterioration in operating conditions for nine months. Meanwhile, industrial output surged the most in 56 years, in April.

In the PMI survey, production at firms operating in the Japanese manufacturing sector fell for a fifteenth successive month in May. However, the latest drop in output was only modest and the least marked in just over a year. Where a reduction in output was signalled, this was frequently linked to fewer new order intakes and unfavourable market conditions.

May’s survey signalled that incoming new orders received by Japanese manufacturers fell for the fifteenth month running. However, the rate of decline continued to ease from December’s record to its weakest in that sequence. While foreign order levels continued to fall, they did so at only a marginal rate as evidence of improved sales to China acted to offset demand weakness from other regions (such as the US and Europe).

May’s survey pointed to a sixth successive monthly decline in prices charged by Japanese manufacturers for their finished goods. Although still sharp, the latest drop in output charges was the least marked since last December. Strong competitive pressures and falling raw material prices were cited as key factors undermining manufacturers’ pricing power in May.

Average cost burdens faced by Japanese manufacturers fell for the sixth month running in May. Despite remaining steep, the rate of decline eased to its weakest for four months. Lower raw material prices were reported to have depressed costs during the month, with steel frequently mentioned by panellists.

Levels of business outstanding fell again in May, extending the current period of decline to sixteen consecutive months. Despite slowing to its weakest since last August, the rate of backlog clearance was still steep in the May survey period. Evidence provided by the survey panel linked the latest decline in work-in-hand to spare capacity resulting from falling workloads.

Japanese manufacturers reduced their workforce numbers for the tenth straight month in May. The rate of job shedding remained sharp, despite easing to its weakest for six months. Of those firms that reported a decline in employment, the majority attributed this to the non-renewal of temporary contracts and lower output requirements.

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said: “The Nomura/JMMA Japan Manufacturing PMI was at 46.6 in May, still below the critical no-change mark of 50.0. However, after bottoming in January 2009, the index has risen by a cumulative 17.0 points to May, showing that the decline in manufacturing activity has eased rapidly. The New Export Orders Index rose 11.1 points, adding to the improvement recorded in April, when it rose by 10.3 points. This indicates that demand for Japanese exports looks set to rebound, supported by stabilisation in overseas economies. Against this backdrop, we expect manufacturing output to improve through to mid-2009.”

The Nomura/JMMA Japan Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 industrial companies. The panel is stratified by Standard Industrial Classification (SIC) group, based on the industry contribution to GDP.