Business conditions continued to improve at a solid pace in the Japanese manufacturing sector in September, according to PMI data issued Monday. It showed the fastest rise since February 2011, a month before a devastating earthquake. New orders rose at the fastest rate in over three years, output growth strengthened and backlogs grew at the fastest pace since April 2006.

On Friday the government said Japan’s inflation accelerated to the fastest pace since 2008 in August on higher energy costs, underscoring pressure on Shinzo Abe, prime minister, to end 15 years of deflation. On Monday, official data showed that Japan’s industrial output posted a modest decline in August from a month earlier as firms eased up on production and consumers slowed their spending on big-ticket items such as cars and refrigerators.

Industrial production dropped a larger-than-expected 0.7% in August from the previous month while, consumer prices excluding fresh food increased 0.8% from a year earlier, the statistics bureau said today in Tokyo. Stripping out energy and perishables, prices fell 0.1%.

The headline seasonally adjusted Markit/JMMA Purchasing Managers’ Index (PMI) – a composite indicator designed to provide a single figure snapshot of the performance of the manufacturing economy – posted above the 50.0 no-change mark for the seventh consecutive month in September. The PMI rose from 52.2 in August to 52.5, the highest level recorded since February 2011.

Japanese manufacturing output expanded at the fastest rate for 31 months, and respondents cited strong sales in North America and an expansion of demand for automobiles as the key drivers. A number also mentioned that their customers’ desire to secure shipments prior to the planned increase in sales tax next year had supported the expansion in demand. Meanwhile, new orders increased at the fastest pace in 40 months.

Following a marginal decline in August, new export orders rose at the sharpest pace for six months in September. The weak yen and an expansion of demand from China, South-East Asia and North America were cited as key drivers.

Employment stagnated in September, for the second successive month, in spite of the expansion in production. Whilst firms who increased their payroll numbers in September cited rising sales volumes as the key driver, the reasons cited by manufacturers who reduced staffing levels concerned mostly voluntary leaving. This implied that the rise in output and new orders failed to encourage recruitment to the extent necessary to offset the natural level of turnover in the Japanese manufacturing sector.

Input prices rose in September for the ninth successive month, though the rate of inflation eased slightly. Respondents cited the weak yen and rising raw material prices as primary factors. Meanwhile, prices charged by Japanese manufacturers remained broadly unchanged for the third consecutive month in September. Anecdotal evidence indicated that the upward-pressure exerted by rising raw material prices was offset to a large degree by high competition.

Outstanding business rose sharply in September and at the fastest pace in over seven years. For the most part, panellists attributed larger backlogs to higher order volumes. Increased sales were also cited as a primary factor behind the rise in postproduction inventories, which increased in September for the first time in 17 months.

Vendor performance remained broadly unchanged in September. Whilst manufacturers of intermediate goods reported a modest improvement, consumer and investment goods producers recorded a marginal increase in suppliers’ delivery times.

Claudia Tillbrooke, economist at Markit and author of the report said: “The latest PMI data indicated a solid improvement in operating conditions in the Japan manufacturing industry. The PMI index itself was constrained to a degree by a stagnation of employment, but nevertheless posted at 52.5, the highest reading in over two-and-a-half years.

“Demand-driven growth supported by the weak yen was evident in output and new orders, which both rose at a solid pace in September. This expansion was not reflected in payroll numbers, and anecdotal evidence indicated that the demand for labour was of insufficient magnitude to offset natural turnover among Japanese manufacturers.

“Employment is however a lagging indicator, and before expanding recruitment manufacturers may desire several more months of solid growth as reassurance that the current expansion in demand will be sustained.”

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