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Asia Economy Last Updated: Jun 3, 2014 - 6:45 AM

Japan's manufacturing PMI dips in May; Inflation at 23-year high in April - real wages to fall
By Michael Hennigan, Finfacts founder and editor
Jun 2, 2014 - 9:11 AM

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Japanese manufacturing firms saw a decline in output for the second month running in May alongside a continued fall in new orders and new export orders according to the latest PMI (purchasing managers' index) survey. On Friday, Japan's official industrial production data showed a fall in factory output by 2.5% in April from a month earlier after a weak 0.7% rise in March. Meanwhile consumer inflation in the deflation stricken economy hit a 23-year high in April but real wages are expected to fall this year.

Consumer prices rose 3.2% in April compared with the same period last year but there is no certainty yet that deflation has been beaten.

The government raised its sales tax rate from 5% to 8% on 1 April and spending had been brought forward to beat the hike and as a result data released on Friday showed that household spending dropped 4.6% in April, compared to a year earlier.

There was a 4.4% dip in retail sales during the month following an 11% surge in March.

"Consumer spending has declined as expected in April, but this is likely to be minor blip and will not affect the ongoing recovery," Martin Schulz, of Fujitsu Research Institute told the BBC.

"Both consumer spending and retail sales will start rising in the latter half of the year."

But Schulz added the government needs to introduce reforms in key sectors of the economy for the recovery to sustain in the long run.

Japan Macro Advisors said in a commentary last week: "Japanese household will be suffering severe decline in real income this year. We expect wage growth in 2014 to be 1.2%, well below the CPI inflation of 2.7%. Situations are even worse for pensioners who now account for 25% of the whole population. From April 2014, public pensions were cut by 0.7%. Stagnating stock market will also not help Japanese pensioners. Policy makers tend to maintain that consumption would recover from summer. We think such assumption are overly optimistic."

In March big companies such as Toyota in the annual pay round raised monthly wages by the equivalent of the cost of a few cups of Starbucks coffee - - without a rise in pay and consequent spending, deflation will continue.

Markit today said rates of decline for both new manufacturing orders and output eased from those seen in April. Employment numbers grew in May for the tenth month running, albeit at a slower pace.

The headline seasonally adjusted Markit/JMMA PM - - a composite indicator designed to provide a single-figure snapshot of the performance of the manufacturing economy - - posted at 49.9 in May, up from 49.4 in April. This signalled a broad stabilisation in business conditions in the sector, following the decline in April.

Output fell for the second month running in May. Similar to April, panellists commented on a decline in demand due to the sales tax increase. That said, the deterioration in output eased in comparison to the previous month. Following a similar trend, new orders continued to fall with panellists again blaming the sales tax rise. However, the decline in new orders was only slight and weaker than in the previous month, with the seasonally adjusted New Orders Index moving closer to the 50.0 no-change mark.

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