Source: Markit Economics

Growth of Japan’s manufacturing sector gained momentum in August. The seasonally adjusted Nomura/JMMA Purchasing Managers’ Index (PMI) rose to 53.6, from 50.4 in the previous month, its highest level since November 2006, signalling a solid improvement in operating conditions. Robust growth of output and new orders supported the PMI at a level above 50.0, although further reductions in employment and pre-production inventories continued to weigh on the sector.

Government data published Monday, showed that industrial production rose 1.9 per cent from June, boosted by inventory restocking and government stimulus measures. The rise however, was less than the 2.3 per cent and 5.7 per cent increase in June and May respectively. July output was 22.8 per cent lower than a year ago. Retail sales data showed a dip of 2.5 per cent in July compared with the same month in 2008, according to the Ministry for Economy, Trade and Industry and rose 0.4 per cent month-on-month. Car sales increased 7.6 per cent from a year ago.

Japanese manufacturing production increased for the third month running in August, with the rate of expansion accelerating to its sharpest for three-and-a-half years. Where a rise in output was signalled, manufacturers frequently linked this to continued gains in new business amid further signs of economic recovery.

Underlying the improved performance of the manufacturing sector was a strong and accelerated rise in total new orders. Respondents cited an improved economic outlook as having a positive impact upon sales volumes. Data revealed that domestic demand was the principal driver of growth in August, with export sales increasing at a slower rate than overall new work. Even so, foreign order levels still rose at the strongest rate for two years, mainly reflecting firmer demand from China.

Downward pressure on manufacturers’ input costs continued in August, extending the current period of deflation to nine months. However, the rate at which costs fell was the second-weakest in that sequence. Reduced raw material prices were reported to have depressed costs during the month, with steel and iron mentioned in particular. Prices charged by Japanese manufacturers were reduced for the ninth successive month in August, decreasing at a marked pace (albeit the slowest for three months). Anecdotal evidence suggested that companies had lowered their output charges in response to reduced cost burdens and continued pressure from customers for discounts.

Manufacturing employment in Japan continued to decline in August, although the pace of job shedding eased to its weakest for a year. Of those manufacturers that recorded a contraction of workforce numbers, many attributed this to the non-replacement of voluntary leavers.

Mirroring the trend in new business, purchasing activity amongst Japanese manufacturing firms rose at the most marked rate since January 2007. Increased demand for inputs meant that suppliers improved their delivery performance at only a negligible pace.

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said: “Japan’s Manufacturing PMI posted 53.6 in August, remaining above the neutral 50.0 threshold for the second consecutive month. Moreover, the 3.2 points improvement in the index was greater than the 2.2 points increase recorded in July, suggesting that the rebound in manufacturing is gaining momentum. On the other hand, this month’s New Export Orders Index showed exports may be losing momentum. Although it rose to 53.2 in August, the month-on-month improvement of the index fell to 0.5 points from 1.5 points in July. We suggest an improvement in export demand is the main factor behind the current rebound in the Japanese economy. We will have to focus on new export orders increasingly as one of the most important indicators regarding the outlook for Japan’s economy.”

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.