Japan Operating Conditions Dip Sharply Since April 2011

Steven Bobson, Europe & Americas Editor
July 31, 2012 /

July data from Markit showed Japan’s manufacturing output falling at the harpest rate in 15 months, as both new orders and new export business decreased at accelerated rates.

A second successive month-on-month decline in purchasing contributed to the strongest improvement in vendor performance since June 2009, while a sharp drop in backlogs of work highlighted growing levels of spare capacity within the sector. On the price front, output charge discounting continued, while average
costs declined at the steepest pace in 32 months.

After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index (PMI™) posted 47.9 in July, down from 49.9 in June, a level indicative of a moderate deterioration in operating conditions.

Moreover, the latest index reading was the lowest in 15 months. All three
market groups registered a worsening of business conditions, with investment goods producers noting the steepest deterioration.

Japanese manufacturing production declined for a second successive month in July, and at an accelerated rate. The overall reduction in factory output reflected lower levels of incoming new business, according to survey respondents.

The pace of reduction in new work was solid, and the steepest since April 2011. New export orders also decreased in July, for the fourth month running, with the rate of reduction the fastest in 15 months.

Companies mentioned demand weakness in China, Europe and the United States.

Reflective of a continued reduction in new business, backlogs of work decreased at the sharpest rate in 38 months. The latest decrease in outstanding work was the fourteenth in as many months. Despite this, the size of Japan’s manufacturing sector workforce continued to expand in July, albeit marginally lower production requirements meant that goods producers reduced their input buying over the month, which in turn enabled suppliers to improve delivery schedules.

Although modest, the rate of lead time shortening was the sharpest since June

July’s survey showed average costs faced by goods producers falling for a second successive month. The rate of decline in purchasing costs was the steepest in 32 months. Where a drop in input prices was signalled, companies mentioned lower oil and steel costs.

In an attempt to maintain competitiveness, Japan’s goods producers lowered their average tariffs for a twelfth month in a row. There were also reports of
discount requests from customers. The rate of output price discounting was solid, and the sharpest since November 2010.

Alex Hamilton, economist at Markit and author of the report said: “Business conditions in Japan’s manufacturing sector took a turn for the worse in July, according to latest PMI survey findings. Factory output, new orders and exports all decreased at the fastest rates since April 2011, while input buying and
backlogs also decreased markedly. These are worrying developments given the weakness of global demand at present.

“On a more positive note, input prices fell for a second straight month, alleviating some pressure on firms’ margins. Meanwhile, jobs growth was
sustained in July, despite lower levels of new business.”


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