Source: Markit Economics

July PMI survey data provided further evidence to signal that a recovery is underway in Japan’s manufacturing economy. The seasonally adjusted headline Nomura/JMMA Purchasing Managers’ Index (PMI) rose to 50.4 in July, from 48.2 in the previous month, pointing to the first improvement in operating conditions for seventeen months. Although only marginal, growth of the sector was slightly faster than the survey’s historical average. In other data released Friday, Japan hit a new record for core consumer price deflation in June, while unemployment hit a six-year high.

A 1.7 per cent year-on-year fall in consumer prices excluding fresh food and the 5.4 per cent unemployment rate highlight the continuing problems for the world's second largest economy.

Measures to tackle the recession include job subsidies to employers and about 35 per cent of the workforce are temporary workers, with low pay and few labour rights.

Japanese manufacturing production increased for the second month running in July, rising at the most marked pace since September 2006. Where an expansion of output was signalled, panellists frequently linked this to renewed growth of new orders. It was the first improvement in firms’ order book positions for seventeen months. Those respondents that reported a rise in new order levels

Japanese manufacturing production increased for the second month running in July, rising at the most marked pace since September 2006. Where an expansion of output was signalled, panellists frequently linked this to renewed growth of new orders. It was the first improvement in firms’ order book positions for seventeen months. Those respondents that reported a rise in new order levels widely attributed this to firmer demand from home and overseas, with export sales rising for the second month in a row. Anecdotal evidence > suggested that improved demand from China was providing the main boost to workloads at manufacturers.

Output prices set by Japanese manufacturers declined for the eighth month running in July. The pace of reduction remained steep, accelerating to its fastest for five months. Companies linked reduced tariffs to increased competition and customer discounts.

Downward pressure on manufacturers’ cost burdens was maintained in July. Input costs have now fallen for eight successive months, reflecting lower global commodity prices. In particular, there was evidence to suggest that falling prices for steel related products had suppressed input costs during the month.

Levels of business outstanding fell in July, extending the current period of backlog clearance to eighteen months. However, the rate of decline slowed to its weakest since February 2008, largely reflecting a return to growth of new business. Despite a rise in new order levels, Japanese manufacturing employment continued to shrink in July. That said, staffing levels decreased at the weakest pace for nine months. Panellists cited the non-replacement of voluntary leavers as a key factor contributing to the latest reduction. The
current period of job shedding now stretches to twelve months.

Mirroring the trend in new business, purchases of inputs by Japanese manufacturers rose modestly in July. Increased purchasing meant that suppliers shortened their delivery times at only a marginal pace, which was the slowest in the current nine month sequence of improvement. Input inventories declined at an accelerated rate in July as firms opted to utilise existing stocks in production, following months of weaker-than-expected sales.

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said:“The Japan Manufacturing PMI rose 2.2 points to 50.4 in July, a larger rise than the 1.6 gain recorded in June. The index was above the neutral 50.0 threshold for the first time in seventeen months, confirming that the manufacturing economy is in a state of recovery. The New Export Orders Index rose 1.5 points in July, the sixth straight month of increase. We think that the Japanese manufacturing sector will continue to recover through autumn, supported by further improvements in export demand.”

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.