Source: Markit Economics

Output at Japanese manufacturers rose solidly in February, extending the current period of growth to nine months according to PMI (Purchasing Managers' Index) survey data issued today. Where a rise in production was signalled, panellists generally attributed this to greater inflows of new orders. Meanwhile, Japan's industrial output increased for an 11th consecutive month in January, according to statistics released on Friday by the Ministry of Economy, Trade and Industry (METI).

Production increased by 2.5 percent in January, and METI cited transport equipment, chemicals and fabricated materials as the industries which contributed to the rise. The index of industrial production was at 91.9. The 100 level is the equivalent to the average of results from 2005. 

At 52.5, the seasonally adjusted Nomura/JMMA Purchasing Managers’ Index remained unchanged from one month previously, pointing to a moderate improvement of operating conditions in the Japanese manufacturing sector. Behind the latest PMI reading, February’s survey pointed to slower growth of output and new business, with the latter easing to only a marginal rate. Job shedding was again fractional, while stocks of pre-production goods increased for the first time in a year. Meanwhile, average vendor performance deteriorated at a marked rate.

The level of new business taken by Japanese manufacturers rose in February, albeit at only a marginal rate that was the slowest in the current eight-month period of expansion. Respondents widely attributed slower new business growth to weak domestic consumption. In contrast, export sales rose at the fastest rate since May 2004, mainly reflecting strong demand from China.

Work-in-hand continued to fall in February as reduced new business growth enabled firms to complete existing workloads. It was the fifth successive month in which backlogs have fallen. Staffing levels fell again in February, decreasing at a marginal rate that was broadly similar to that seen in the preceding two months. Reduced employment mainly reflected restructuring efforts. This was primarily achieved through the non-replacement of departing staff.

Average input costs faced by Japanese manufacturers rose for the second month running in February. Higher raw material prices were cited by panellists as a key source of inflationary pressure, with oil mentioned in particular. Although solid, the rate of inflation was still much slower than that seen before the onset of the financial crisis.

February data signalled that manufacturers continued to reduce their output charges on average, largely as a result of strong competitive pressures and requests from clients for discounts. The rate of price discounting remained solid, but much slower than the near-record seen in November last year.

Purchasing activity rose in February following two successive months of reduction. Subsequently, pre-production inventories increased for the first time in twelve months. Meanwhile, average vendor performance deteriorated at the fastest rate since June 2006. Panellists noted that supply shortages at vendors were primarily to blame for slower lead times, with electronic goods mentioned in particular.

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said: “The Japan Manufacturing PMI for February was unchanged from January, at 52.5, remaining above the dividing line of 50.0 for the eighth consecutive month. Although the rapid rise of the index from February through to September in 2009 has abated, it still indicates strong production activity in Japan. We see that ongoing firmness in exports supported by demand from Asia, especially China, has boosted manufacturing production. The New Export Orders Index, which rose rapidly by 3.7 points to 55.2 in February, suggests that export growth gained significant momentum on the month.

But we expect the strength of the yen trading at around $1/¥90 (compared with the break even point for export companies of 92.9 yen per dollar in FY2009 survey) gradually to have a negative impact on exports and that growth of exports will slow in the near future.”

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.