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Asia Economy Last Updated: May 31, 2011 - 6:12 AM

Japan’s manufacturing sector returned to growth in May
By Finfacts Team
May 31, 2011 - 3:33 AM

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Japan’s manufacturing sector data for May published today showed a return to growth as supply chain pressures enabling firms to resume factory operations following the disruption caused by the March 11 Tohoku earthquake. On the demand side, overall new business decreased marginally, while firms reduced their staff numbers for the second month in succession. Meanwhile, output charges rose for the first time since November 2008 in response to strong cost inflation.

In official data published today, Japanese industrial output was up a seasonally adjusted 1% in April from the previous month, the Ministry of Economy, Trade and Industry said. Meanwhile, Japan’s unemployment rate rose to 4.7% in April from 4.6%, the statistics bureau said in a report in Tokyo. The median forecast of 30 economists surveyed by Bloomberg News was for the rate to rise to 4.7 percent.

The seasonally adjusted headline
Purchasing Managers’ Index (PMI)posted 51.3 in May, up from 45.7 in April, signalling a modest improvement in manufacturing sector operating conditions. The month-on-month rise in the index was among the largest since data were first compiled in October 2001.

Overall new business fell further in May, although the pace of reduction was only marginal. New export orders fell at a similarly mild rate, extending the current period of decline to three months. Anecdotal evidence suggested that demand remained subdued following the earthquake and tsunami, with China and the US mentioned in particular.

Despite this, manufacturing production increased in May, ending a two-month period of substantial decline. The index measuring month-on-month movements in output climbed more than sixteen points to signal a modest rate of expansion. Manufacturers commented that renewed production growth reflected the resumption of factory operations in the wake of the earthquake.

A sharp easing in supply side pressures in May enabled many firms to restart production lines. Around 24% of panellists reported longer lead times from one month ago, but this was down from 55% in April. The rate of delivery time lengthening remained steep nonetheless.

Stocks of finished goods rose in May, ending a ten-month period of decline. This in part reflected efforts to build stockpiles in anticipation of future power outages.

Higher output requirements, on average, prompted firms to increase their purchasing activity for the first time since February. There were also reports that firms had acquired inputs in an attempt to safeguard against supply side disruptions. Consequently, the rate at which stocks of purchases were depleted eased sharply since April.

Manufacturing employment in Japan fell for a second successive month during May. However, the rate of job shedding was only marginal. Where a fall in staff levels was recorded, panellists linked this to a combination of resignations and the non-renewal of temporary contracts. Manufacturers that  added to their workforce numbers attributed growth to graduate recruitment.

On the prices front, input cost inflation eased to a four-month low in May, but remained steep nevertheless. Higher raw material prices and, in some cases, increased fuel costs drove the latest rise in purchasing costs. This in turn contributed to the first month-on-month rise in output prices since November 2008.

Commenting on the Japanese Manufacturing PMI survey data, Alex Hamilton, economist at Markit and author of the report said:"PMI survey data pointed to a welcome rebound in Japanese manufacturing activity in May, as a sharp easing in supply chain pressures enabled firms to restart production lines following the disruption caused by March’s earthquake and tsunami. The index measuring trends in production jumped almost 17 points to signal a return to growth for the first time since February. Production was also boosted by firms building up their stocks of finished goods, which rose for the first time in eleven months, in anticipation of summer power outages.

 "Reduced supply side constraints meant that firms were able to acquire additional inputs in May, making them less reliant on their inventory holdings. This was signalled by a record easing in the rate of pre-production stock depletion. Disappointingly, manufacturers continued to cut their payroll numbers, reflecting uncertainty about the rate at which the economy can recover."

The Markit/JMMA Japan Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 industrial companies.

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