Source: Markit Economics

Japan’s manufacturing sector continued to expand at a solid rate during June supported by marked gains in both output and new orders but growth slowed. Payroll numbers increased for a third successive month, while there was a marginal rise in stocks of finished goods for the first time in nine months. Meanwhile government data also issued Wednesday, showed that Japan’s industrial production and household spending dipped in May and the unemployment rate unexpectedly increased, in a signal that the recovery of the world’s second-largest economy may slow.

Factory output fell 0.1 per cent from a month earlier as stockpiling rose, the Trade Ministry said. The economy lost 240,000 workers in May from a month ago and the unemployment rate rose to 5.2 per cent. A separate report showed that the ratio of jobs to applicants rose to 0.50 in May, meaning there are 50 positions for every 100 candidates. Spending by Japanese households of two or more people fell 0.7 per cent in May from a year earlier, the Ministry of Internal Affairs and Communications said. May's decline compared with a median market forecast for a 0.5 per cent rise, following a 0.7 per cent annual decline in April.

The headline Nomura/JMMA Japan Manufacturing PMI (Purchasing Managers' Index) posted a reading of 53.9 for June, down from May’s near four-year peak of 54.7 but nonetheless signalling a firm improvement in operating conditions and the twelfth consecutive month of growth. Over the quarter as a whole, the PMI averaged its strongest reading since Q3 2006.

June’s fall in the PMI - -  the first in five months - - arose from weaker contributions from the output and new order components, which continued to grow but at slightly weaker rates. Anecdotal evidence suggested continued market recovery, with demand from both domestic and overseas sources reported to be firm. Despite easing further on April’s record, growth of new export orders was the third-strongest in the survey history. China remained a key source of demand, and growth was particularly strong in the Basic Metals and Electrical & Electronics sectors.

Further evidence of capacity pressures was signalled in June, with backlogs of work rising for a third successive month. Some panellists attributed this to insufficient personnel numbers and, encouraged by pipeline new business, chose to raise staffing levels at their plants. Net employment in the sector rose for a third successive month, although growth was only marginal and weaker than in May.

A number of panellists also noted some disruption to production arising from input delivery delays. Average lead times lengthened for a tenth successive month as global demand for raw materials continued to improve, leading to stock shortages and capacity constraints at vendors. Responding to their own higher output requirements, Japanese manufacturers raised purchasing activity for a fifth successive month.

In spite of production constraints and delivery delays, stocks of both purchases and finished goods increased in June.

Meanwhile, prices data showed that average input costs continued to increase, rising for a sixth successive month. The rate of inflation eased since May, but nonetheless remained marked. Companies reported higher prices for a range of metals and petroleum products in the latest survey period.

Despite another round of cost rises, Japanese manufacturers again chose to reduce their output charges in June. The rate of deflation was solid, albeit the slowest for nineteen months. Competitive pressures and specific client requests for discounts were noted as factors leading to a decline in output charges.

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 June fell for the first time in five months, by 0.8 points to 53.9. However, it remains above the dividing line of 50 for the twelfth consecutive month, suggesting that manufacturing operating conditions remain firm. The New Export Orders index, a leading indicator of Japanese exports, also fell 0.6 points, but it was still high at 56.9.

The continued high level of new export orders suggests that exports will remain solid. While some have been concerned about the impact on the Japanese economy of financial market disruption triggered by the European fiscal troubles, so far that impact appears to have been small, and we expect Japanese manufacturing sector continue to improve for a while."

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.