October PMI (purchasing managers' index) data indicated a further strong performance of the Japanese manufacturing sector. Output increased at the fastest pace for 46 months, whilst new order growth hit a four-year high. Meanwhile, official data showed today that Japan's industrial output rose 1.5% in September from the previous month. Meanwhile, the Bank of Japan said Thursday it expects the country's inflation rate to reach 1.9% in fiscal 2015, almost achieving its target of 2% price inflation in about two years, buoyed by its drastic monetary easing steps adopted in April this year.

Kyodo News reports that in leaving its price expectation unchanged in its semiannual economic outlook report for the next three years, the central bank kept intact its view of achieving the target from the end of fiscal 2014 through fiscal 2015, while citing a wage increase as one of factors that require monitoring for future price development.

The BOJ expects the year-on-year rate of change in Japan's core consumer price index to rise 0.7% for fiscal 2013 and 1.3% for fiscal 2014, compared with July's projections of 0.6% and 1.3%, respectively, excluding the effects of a scheduled 3-percentage-point sales tax hike next April.

The core consumer price index, which excludes food, was up 0.7% compared with 0.8% in August, the Management and Coordination Agency said last week. With food prices factored in, the index was up 1.1%.

However, Bloomberg reports today that Japan’s salaries extended the longest slide since 2010, even as Prime Minister Shinzo Abe urges companies to raise workers’ wages as part of his bid to reflate the world’s third-largest economy.

Regular wages excluding overtime and bonuses fell 0.3% in September from a year earlier, marking a 16th straight month of decline, according to labor ministry data released today. Total cash earnings rose 0.1%.

In Manufacturing, backlogs of work also rose at a solid pace as manufacturers struggled to keep pace with growing demand, and stocks of purchases were depleted as a consequence. However, in spite of this strengthening of production and new orders, employment was broadly flat for a third successive month.

The headline seasonally adjusted Markit/JMMA (PMI) - - a composite indicator designed to provide a single figure snapshot of the performance of the manufacturing economy - -  posted at 54.2 in October, up from 52.5 in September. This was the highest reading posted since May 2010, signalling a sharp improvement in operating conditions in Japan’s manufacturing industry.

Production rose at the fastest pace since December 2009, as October marked the eighth consecutive month of output expansion at Japanese goods producing firms. Respondents largely attributed this to rising foreign demand, driven in part by the continued weakness of the yen.

Meanwhile, new order growth accelerated for the third successive month, as the seasonally adjusted New Orders Index hit a four-year high in October.

Of the 22% of panellists who saw an increase in new business, a number attributed the latest increase to a spike in demand prior to the rise in the sales tax next year.

Strong new export order growth was also evident from October PMI data, and anecdotal evidence indicated that this was largely due to the weak yen (aiding Japanese exporters’ price competitiveness) and an expansion of demand from North American markets.

Outstanding business in the Japanese manufacturing sector rose sharply in October, but growth eased slightly from September’s 89-month high. Respondents largely attributed the increase in backlogs of work to a rise in incoming orders and improvements in business conditions in the automobile industry.

Despite the sharp expansions seen in output, new orders, and outstanding business, employment remained broadly unchanged for the third successive month in October. This was nevertheless an improvement on the seven-month sequence of job shedding from October 2012 through to April 2013.

Prices charged remained broadly flat in October, as has been the case for the past four months. Meanwhile, input prices increased for the tenth successive month, though the rate of inflation eased further from August. Panellists highlighted the depreciation of the yen as a primary driver of the latest cost inflation. Rising raw material prices were also commonly cited as a leading contributor to the rise in input prices.

Claudia Tillbrooke, economist at Markit and author of the report said: “October saw operating conditions in the Japanese manufacturing industry improve at the sharpest pace for over three years, driven by a surge in new orders. The data signalled that the latest expansion was largely demand-driven and apparently unimpeded by the Prime Minister’s recent confirmation of a sales tax hike next April.

“However, whilst new order growth hit a four-year high and production grew at a similarly sharp pace, employment failed to follow suit in October. Payroll numbers were broadly flat for a third consecutive month and appeared to have been thus far unaffected by the structural reforms constituting Prime Minister Abe’s “third arrow”.

“Firms’ reluctance to hire may well indicate uncertainty regarding the future, but could also stem from the inflexibility of Japan’s labour market. The sustainability of the recent growth trend looks set to be tested by the labour market rigidities, as backlogs of work continue to rise.”

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.

Check out our subscription service, Finfacts Premium , at a low annual charge of €25