Deteriorating demand in both domestic and export markets led to a solid contraction of Japanese manufacturing output during March and an overall worsening of operating conditions for the first time in five months. Inflationary pressures showed no signs of abating either, with rates of increase in both input and output prices reaching fresh survey highs at the end of the first quarter.
The headline Nomura/JMMA Purchasing Managers’ Index (PMI) – a composite indicator designed to provide a single-figure snapshot of the health of the manufacturing sector – slipped below the crucial 50.0 no-change mark in March for the first time since last October, recording 49.5 to signal a slight deterioration of overall operating conditions.
“The latest survey painted a rather bleak picture, with both output and new orders contracting concurrently for the first time in five months,” said NTC economist Paul Smith. “While local demand has softened further, a weakening external sector will further add to worries among those fearful that a principal pillar of the economy in recent times will be taken away. Exports to the
Both output and new orders contracted during March
February’s survey indicated that manufacturing output contracted in March. Although only moderate, it was the first decline in output since last October and was the strongest seen since last July. Particular weakness in output persisted in the electrical & electronics and timber & paper sectors, while there was a sharp slowdown in vehicle manufacturing – the sector which was a key driver of overall expansion around the end of 2007 and the start of this year.
The overall decline in production signaled in March was closely linked to a fall in new orders. The solid decline in new business followed four months of growth and was the strongest registered since last July. Reports from the survey panel suggested that domestic demand had softened as clients postponed investment expenditure given the uncertain economic outlook. The construction sector remained a source of weakness.
External demand also faltered at the end of Q1, as highlighted by the strongest contraction of new export orders since the end of 2001. Weakened demand in key export markets (such as the
Record rates of input and output price inflation
Input costs continued to rise at a substantial rate in February, as the inflationary effects of record global oil prices were felt in related products such as energy and fuel. Panelists continued to report that raw material prices in general had increased. Inflation partly reflected the continued short supply of a number of raw material inputs on world markets. This in turn helped to explain lengthening lead times at suppliers as average vendor performance continued to deteriorate in March and to the greatest extent for a year-and-a-half.
The latest lengthening of lead times occurred in spite of a further contraction of purchasing activity. Input buying fell for a third successive month and at the fastest rate since last October.
Faced with further pressure on their margins, Japanese manufacturers raised their output charges at a record pace during March. However, competitive pressures ensured that the rate at which output charges were increased remained well below the equivalent measure of input prices.
Finally, latest data showed that backlogs of work declined for a second successive month in March, to provide evidence of emerging slack in the manufacturing sector. Work outstanding declined at the strongest rate since May 2003. Manufacturing employment increased for a 41st consecutive month, albeit at only a marginal rate.
