Japan's Factory Activity Dips for 4th Straight Month, PMI Shows

Japan's manufacturing sector has been grappling with a sustained decline in activity, as indicated by the au Jibun Bank Japan Manufacturing PMI. The index has dipped for the fourth consecutive month, reaching 49.8 in August, according to a private-sector survey by S&P Global Market Intelligence. This reading, while up from July's 49.1, remains below the 50 threshold that separates growth from contraction.

The sub-indexes for new orders and output have contributed to the overall PMI decline over the past four months. New orders have contracted at a slower pace in August, with the output subindex expanding to its highest level since May 2022. However, the recovery in output was not sufficient to offset the decline in new orders, leading to a continued contraction in overall factory activity.

The primary factors driving the contraction in new orders include tepid demand in both domestic and overseas markets, overstocking, and weak investment from clients. Sluggish demand from key export markets such as China and South Korea has also weighed on new exports, which contracted to the lowest level in five months. This slowdown in new orders highlights the challenges faced by Japanese manufacturers in the face of a global economic slowdown.

The slower pace of output growth has impacted employment trends within the manufacturing sector. While employment growth has been sustained, it has not been sufficient to offset the decline in factory activity. This has led to a backlog of works falling faster alongside a renewed rise in stocks of purchases, indicating a slowdown in production capabilities.

The sustained decline in factory activity has potential implications for Japan's overall economic growth and inflation. The weaker overseas demand is a worry for policymakers, but a recovery in consumption has provided a boost to the economy. This has underpinned expectations that the Bank of Japan (BOJ) will keep raising interest rates as it exits a decade-long massive stimulus programme.

Input prices have grown to the highest level since April 2023, as the softer yen and higher prices of raw materials boosted inflation. Firms have raised output charges to customers, though at the softest rate since June 2021. Despite these price pressures, firms remain confident about their business outlook, expecting a rise in sales and demand for sectors such as auto and semiconductors.

In conclusion, Japan's manufacturing sector has been facing a sustained decline in activity, with new orders and output sub-indexes contributing to the overall PMI decline. The slowdown in new orders highlights the challenges faced by Japanese manufacturers in the face of a global economic slowdown. The slower pace of output growth has impacted employment trends within the manufacturing sector, with potential implications for Japan's overall economic growth and inflation. Despite these challenges, firms remain confident about their business outlook, expecting a rise in sales and demand for key sectors.