Modest Deterioration in Japan Operating Conditions Recorded in September
Operating conditions in Japan’s manufacturing sector continued to worsen at a modest pace in September.
Output and new orders both fell amid reports of a general stagnation of economic activity in domestic and overseas markets. Manufacturers continued to deplete inventories, while they made further sharp inroads into their work outstanding.
Payroll numbers were little changed. On the price front, companies responded to the weaker demand environment by discounting their charges to a greater degree. These efforts were aided in part by a further modest reduction in input prices.
Commenting on the Japanese Manufacturing PMI survey data, Paul Smith, Senior Economist at Markit and author of the report said: “Despite the modest rise in the headline PMI during September, the latest survey data remained consistent with an ongoing contraction of industrial production on a quarterly basis.
“At the heart of the manufacturing sector’s underperformance remains weakness in key export markets, with panellists in particular noting the adverse impact on their order books of the ongoing slowdown of global economic growth, particularly from emerging markets.
“Moreover, a strong yen is seemingly exacerbating softness in overseas demand and manufacturers are subsequently being forced to squeeze margins by cutting charges at an accelerated pace.”
After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index (PMI) improved to a three-month high of 48.0 in September (August: 47.7) but, by remaining below the 50.0 no-change mark, again signalled a modest deterioration in operating conditions.
Production and new order volumes continued to decline on a monthly basis. Although slightly weaker than in August, rates of contraction remained marked, particularly in the investment goods sector.
Panellists reported that the generally weaker economic environment had undermined new order book wins. New orders from foreign clients were reportedly lower due to a deterioration in demand (with China mentioned in particular) and, in some instances, the strength of the yen.
Destocking of input and warehouse inventories persisted in September. A number of companies deliberately cut stocks in line with falls in production requirements and a relatively downbeat assessment of future demand and output trends.
Capacity remained seemingly under little pressure during the latest survey period, with companies able to eat into their backlogs for a sixteenth successive month and again at a marked pace. Staffing levels were little changed on the month, rising only slightly. Downward pressure on employment growth came from the nonreplacement of leavers at some companies.
Given ongoing falls in orders and output, Japanese manufacturers chose to reduce their purchasing activity for a fourth successive month in September. This helped to ensure there remained little pressure on the supply of inputs – average lead times were broadly unchanged in the latest survey period.
Weaker demand for raw materials and semimanufactured goods led to fall in input prices during September. Input costs fell for a fourth month in succession, although at the weakest pace since June.
Lower input costs provided manufacturers with some room to pursue more aggressive discounting strategies during September. Average output charges fell to the steepest degree for over two years. Competitive pressures also weighed on company pricing power during the month.