Source: Markit Economics

Growth of the Japanese manufacturing sector was registered for the fourth consecutive month in October. Despite falling slightly from September’s three-year high, the seasonally adjusted headline Nomura/JMMA Purchasing Managers’ Index (PMI), which posted 54.3, continued to point to a solid improvement in operating conditions that was the second-fastest since September 2006. Japanese consumer prices continued to fall sharply in September and the jobless rate also declined, according to data published Friday.

Core consumer prices excluding fresh food dipped 2.3 per cent last month from a year ago, slightly lower than the record 2.4 per cent fall in August, according to data published Friday.

However, the decline in so-called “core-core” consumer prices, which exclude fresh food and energy prices, accelerated to 1 per cent in September, from 0.9 per cent in the previous month.

Also on Friday, data showed that unemployment rate for September was 5.3 per cent, down from August’s 5.5 per cent.

On Thursday, it was reported that Japanese industrial production rose for a seventh consecutive month in September, boosted by strong export demand from China and the global recovery.

Manufacturers increased output by 1.4 per cent in September from August, a larger increase than expected. That followed an an increase of 1.6 per cent in August.

The Bank of Japan said today it will stop buying corporate debt in December, ending some of the emergency credit measures launched earlier this year.

The central bank also kept its key interest rate unchanged at 0.1 per cent as widely expected.

Citing stabilisation of financial markets, the central bank voted 7-1 to end its purchases of corporate bonds and commercial paper as scheduled in December. However, it extended a special low-interest loan program until the end of March and will continue accepting corporate debt as collateral until the end of 2010.

"Japan's financial environment, with some lingering severity, has been increasingly showing signs of improvement, particularly in the CP and corporate bond markets," the central bank said in a statement.

Japanese manufacturing production rose further in October, extending the current sequence of growth to five months. Although slightly down on the near-record seen in September, the rate of expansion was again substantial. Production was raised in response to an improved business environment and further gains in new orders. Growth of new business was the second-sharpest for forty-three months, buoyed by stronger demand and new product developments.

Levels of new export business continued to rise in October, although the pace of expansion was the weakest for four months and far slower than that of overall new business. This mainly reflected adverse exchange rate factors and suggests that the overall rise in new work centred on the domestic market in October.

Prices charged by Japanese manufacturers were reduced for the eleventh successive month in October, decreasing at the most marked rate for three months. Strong competitive pressures were widely reported to have eroded firms’ pricing power, forcing them to cut or maintain charges in order to preserve market share.

In line with the trend seen throughout the past eleven months, average input costs faced by Japanese manufacturing companies decreased in October. However, the pace of reduction was far slower than the near-record seen in April, easing to the weakest in 2009-to-date. Reduced steel prices were identified by panellists as a key source of deflationary pressure.

Companies reacted to rising production requirements by increasing their input buying at the second-strongest rate since the series began in October 2001. Increased demand for inputs meant that supplier capacity was placed under added pressure in October. Subsequently, the rate at which vendor performance deteriorated accelerated to the most marked for nineteen months.

Staffing levels in the Japanese manufacturing sector fell for the fifteenth month running in October. Despite accelerating since September, the rate at which jobs were shed was far slower than the considerable declines seen around the turn of the year. Where a contraction of workforce numbers was signalled, panellists frequently linked this to the non-replacement of departing staff and restructuring programmes.
Employment

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said: “October’s Japan Manufacturing PMI fell for the first time in nine months, by 0.2 points to 54.3. It remains above the key dividing line of 50.0, indicating that production activity continues to recover, but suggesting that the pace of improvement is slowing. The New Export Orders Index, a leading indicator of Japanese exports, fell 2.5 points to 51.6. Although this is the fifth consecutive month in which the figure has been higher than 50.0, the October reading suggests that the pace of improvement has obviously slowed. An improvement in export demand was the main factor behind the rebound in Japanese manufacturing output. Therefore, we think that the strong rebound in production activity in Q2 and Q3 now looks likely to run out of steam from 2009 Q4.”