Data Show Sharpest Decline in Japan Business Activity Since September 2011

Kimberly Watson, Editor in Chief
August 07, 2012 /

Japanese service sector activity decreased further in July, and at the sharpest rate in ten months.

The latest decline largely reflected a fall in incoming new business, which in turn contributed to another month of backlog depletion. Despite this, service providers added to their staff numbers over the month, albeit at only a marginal rate.

Moreover, companies expressed renewed optimism regarding the near-term business outlook. On the price front, service sector firms continued to reduce their output charges, in spite of a rise in average costs.

The headline seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – fell from 49.3 to a ten-month low of 47.5 in July, signalling a moderate reduction in Japanese service sector activity.

Meanwhile, manufacturing PMI™ data showed factory output falling at the fastest rate in 15 months. Consequently, the Composite Output Index (covering manufacturing and services) dipped from 49.1 to 47.4 in July, and indicated the steepest reduction in private sector activity since September 2011.

Behind the latest reduction in service sector activity was a decline in new business – the first since January. The rate of reduction in new orders was only modest, however, and weaker than the long-run series average.

This, coupled with a stronger decline in manufacturing new orders, meant that private sector new work fell to the greatest extent in 13 months.

With new business falling in July, service providers transferred resources to completing existing volumes of work-in-hand. The latest decline in backlogs of work was nonetheless the weakest in three months.

Composite data showed the sharpest decline in outstanding business for ten months.

Japanese service providers added to their staff numbers for the first time in three months. Although only modest, the rate of jobs growth was the second-strongest since June 2008. Meanwhile, the size of the private sector workforce grew at only a marginal rate, according to composite PMI data.

Average input costs faced by service providers rose during July, following a decline in June. However, the rate of input cost inflation was only modest. Input prices have now risen in eight of the past ten months. In contrast, goods producers reported a further reduction in average costs during July.

Japanese service sector companies reported a fifty-third successive month-on-month reduction in output prices during July, although the pace of discounting was the slowest since February 2011.

Japanese service sector firms expressed renewed optimism in the one-year business outlook, with the degree of positive sentiment the second-highest in 37 months.

Respondents to the latest survey attributed confidence to expectations of new business wins and better economic conditions. Business expansion plans were also mentioned by a number of survey participants.

Alex Hamilton, economist at Markit and author of the report said: “Japan’s private sector activity contracted at a sharper rate during July, in a further sign that growth of the wider economy is softening as we head into the second half of the year. As was the case in June, the slowdown was broad-based across both manufacturing and service sectors.

“On a more positive note, total jobs growth was sustained, price pressures remained muted and service sector optimism hit the second-highest in 37 months.”


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