Japan's Factory Activity Shrinks at Slower Pace, PMI Shows

When you actually break down the au Jibun Bank flash Japan manufacturing PMI report, you don't see much that jumps out at you. In fact, you see less than much. The headline reading moved closer to neutrality amid softer reductions in both production and new order intakes, indicating the softest contraction in three months (S&P Global Market Intelligence, 2024). The final PMI stood at 49.6 in December, slightly higher than the flash reading of 49.5 and November's 49.0, but still below the 50.0 threshold that separates growth from contraction for the sixth straight month (Reuters, 2024).

The subindex of production shrank for a fourth straight month in December but at a slower pace than last month. Manufacturers noted that subdued new orders were the main factor behind the decline in output. New orders contracted for the 19th straight month on subdued demand in both domestic and key overseas markets, with some firms in the survey suggesting the semiconductor market was behind the weakness in new orders (Reuters, 2024).

Employment expanded in December, reversing its fall in November, to reach its highest level since April. Firms in the survey said they hired more workers due to labour shortages as well as in preparation for future demand. However, business confidence in the factory sector softened to the lowest level since May 2022, indicating ongoing cost pressure (S&P Global Market Intelligence, 2024).

Input prices grew at the strongest pace since August, with firms citing higher costs of raw materials and labour. The weak yen also boosted inflation. To cope with rising prices, firms raised their output prices at the fastest rate in five months. Manufacturers stayed confident about their outlook as they expect business to expand thanks to the launch and mass production of new products (Reuters, 2024).



Perception, though, is everything. A belief that the manufacturing sector will continue to struggle due to weak demand and cost pressure is leading us down. The semiconductor market weakness is harming this entire nation's supply chain and the manufacturing companies simply haven't adjusted to the new world by bringing more workers to the job. They were caught flatfooted by the cost pressure. There are plenty of workers around to be hired. The services sector, after years of cutting back, hasn't adjusted either. They can't find workers because they terminated so many -- and those workers have moved on.

But the big job-creating industries? They have slowed. Housing? Affordability has crushed it. Autos? A once-robust industry has been enduring endless pain, including the restructuring -- read job cuts -- at major automakers this weekend. Obviously, retail has not made up for it. The Amazon pay increase may be for drivers it is adding, or for line employees, but I think tech will cap their employment.

So what are we so worried about? I think we are worried about a Bank of Japan (BOJ) who has told us to worry. If the BOJ looked under the hood, it wouldn't be so worried about the consequences of unemployment, and should be more worried about businesses not expanding because the boom areas have too high a cost right now to expand. With digitization and higher costs for workers in a handful of industries putting an end to fast growth, the only conclusion from these numbers is that the BOJ needs to cool it -- both with the rhetoric and the actions. It needs to let the banks make more money so they can lend more to make expansion more likely for industries that are labour constrained. In other words, if the BOJ could create workers to make up for the severe cut in hours truckers are allowed to drive, we might have very little inflation -- save energy, and even there, given heating energy collapsing, it's a real offset to higher pump prices. To lockstep rate raises is to generate a pretty severe slowdown. Maybe that's what BOJ Governor Haruhiko Kuroda wants. From these numbers, sadly, he's about to get his wish rather quickly.