Japanese manufacturing output, new business and employment fell in December

December data pointed to another deterioration in Japanese manufacturing sector operating conditions, although the rate of contraction eased to the weakest in three months. This primarily reflected slower declines in output, total new business and employment. On the prices front, input cost inflation quickened to the fastest since May. However, output prices continued to fall amid strong competition for new work.

The headline seasonally adjusted Markit/JMMA Purchasing Managers’ Index (PMI) posted 48.3 in December, up from 47.3 in November. The index was at a level indicative of a modest deterioration in business conditions. Sub-50 PMI readings were recorded across all three market groups monitored by the survey.

Manufacturing output in Japan fell further in December, albeit at the slowest rate in the three months of continuous decline. Where a fall in output was signaled, respondents widely attributed this to falling new business.

Overall new work fell solidly in December, as panelists continued to report underlying demand weakness. However, the pace of reduction eased to the slowest since September. In contrast, the rate of decline in new export business quickened to the fastest in 20 months. Anecdotal evidence suggested that reduced export sales reflected sluggish demand from external sources.

Spare capacity remained evident in December, with backlogs of work falling for the sixth month in succession. As a result, firms continued to reduce staff levels, albeit at only a marginal rate. Lower personnel numbers reflected employee retirements.

Slower lead times were signaled in the latest survey period, with panelists attributing this to supply shortages at vendors. However, the rate at which supplier performance deteriorated was only slight, as firms continued to reduce their purchasing in line with falling production requirements. That said, the rate of decline in buying activity eased since November.

Average input costs faced by Japanese manufacturing firms rose markedly in December, with the rate of inflation quickening to a seven-month high. Even so, the latest increase was slower than the long-run series average. Panelists cited higher raw material prices as the key driver of inflation, with cotton, petroleum, rare metals and steel mentioned in particular.

Despite a sustained rise in input costs, manufacturers continued to reduce their output prices in December. This primarily reflected strong competition for new business. There were also reports of client requests for lower prices. The latest decrease stretches the current period of decline to more than two years.

Commenting on the Japanese Manufacturing PMI survey data, Alex Hamilton, economist at Markit and author of the report, said: “Japan’s manufacturing sector continued to contract in December, bringing to a close a year of mixed fortunes. Output grew robustly in the first half of 2010 before losing steam and contracting toward year-end. Manufacturers remained hesitant with regards to hiring, as underlying demand weakness and spare capacity persisted in December. On the prices front, robust cost inflation, coupled with continued output price discounting, will likely place added pressure on firms’ operating margins heading into 2011.”