Source: Markit Economics

Japanese manufacturing sector in May improves at fastest rate in forty-four months. At 54.7 in May, up from a revised figure of 53.8 in the preceding month, the seasonally adjusted Nomura/JMMA Purchasing Managers' Index (PMI) pointed to a solid improvement in Japanese manufacturing sector operating conditions that was the fastest since September 2006. Meanwhile also today, government data showed that industrial production rose 1.3 per cent in April from March, which had recorded a 1.2 per cent rise.

Last week, it was reported that Japan's economy expanded at a 4.9 per cent annual rate in the three months ended March, boosted by strong export demand in Asia. However, other data showed that the recovery had yet to have an impact in the domestic sector where household spending fell 0.7 per cent in April on-year compared with a March rise of 4.4 per cent; other data showed that unemployment rose to 5.1 per cent in April from 5.0 per cent in March and Japan's core consumer price index, which excludes volatile fresh food prices, dipped 1.5 per cent in April from a year earlier, marking the 14th straight month of falls and exceeding a 1.2 percent drop in March.

Behind the latest PMI picture, May's survey indicated faster increases in both output and new business, while job creation in the sector was signalled for the second successive month. Meanwhile, stocks of purchases continued to fall as firms responded to further delays in the supply chain by utilising existing inventories in production.

Manufacturing output in Japan rose again in May, increasing at a marked rate that was the fastest in 2010–to–date. Where a rise in production was signalled, this was frequently linked by panellists to greater inflows of new business, which rose for the eleventh month running in May. The rate of expansion in new work was marked, and accelerated to the sharpest in seven months. According to survey respondents, new business growth reflected greater demand from both domestic and external markets. Despite easing from the previous month, the rate of expansion in new export business was substantial. Anecdotal evidence suggested that South East Asia and China were key sources of new export business.

Backlogs of work were accumulated for the second successive month in May. Prior to this period of growth, outstanding business had fallen for six months in a row. Furthermore, the pace of expansion was the most marked since July 2006. Growth of unfinished business primarily reflected further gains in new business.

Japanese manufacturing employment continued to rise in May, increasing at the fastest rate since April 2008. Those respondents that reported a rise in staff numbers often linked growth to greater inflows of new business. Some respondents also mentioned that employment growth reflected an increase in graduate intakes.

Average input costs rose for the fifth successive month in May, with prices paid for copper, fuel and steel all reported to have risen on the month. The rate of inflation was marked, but slower than in the previous month. Nonetheless, strong competition restricted the ability of manufacturers to pass on higher costs to clients, with output prices falling for the eighteenth month in succession. Respondents also commented that output price deflation reflected client requests for lower prices.

Purchasing activity rose in May, largely as a result of higher intakes of new business and a subsequent rise in output requirements. Meanwhile, increased delivery delays meant that firms opted to utilise existing stocks of raw materials in production.

Japan's unemployment rate climbed to 5.1% in April from March. Naomi Fink, Japan strategist at Bank of Tokyo Mitsubishi, on Friday explained why the Bank of Japan cannot do very much to help increase the availability of jobs:

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said: "The Japan Manufacturing PMI in May rose for the third consecutive month, by 0.9 points to 54.7. It remains above the dividing line of 50 for the eleventh consecutive month, suggesting that manufacturing operating conditions remain solid. The New Export Orders index fell 1.5 points, but it was still high at 57.5.

Although global financial markets have remained unstable due to European fiscal risk, strong growth in exports continues to underpin the manufacturing recovery. We expect exports to Asia, especially China, to remain firm, supporting the Japanese economy for a while. Moreover, the PMI survey showed that the employment situation is also improving steadily. The Employment Index rose 0.4 points to 51.4, remaining above 50.0 for the second consecutive month. With production activity in the manufacturing sector anticipated to maintain its recovery path, we expect the improvement in employment to continue over the coming months."

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.