Japan manufacturing still solid, but PMI slips 0.8 points to 53.9

Japan’s manufacturing sector continued to expand at a solid rate during June supported by marked gains in both output and new orders. Payroll numbers increased for a third successive month, while there was a marginal rise in stocks of finished goods for the first time in nine months.

The headline Nomura/JMMA Japan Manufacturing Purchasing Managers’ Index (PMI) posted a reading of 53.9 for June, down from May’s near four-year peak of 54.7 but nonetheless signaling a firm improvement in operating conditions and the 12th consecutive month of growth. Over the quarter as a whole, the PMI averaged its strongest reading since Q3 2006.

June’s fall in the PMI – the first in five months – emanated from weaker contributions from the output and new order components, which continued to grow but at slightly weaker rates. Anecdotal evidence suggested continued market recovery, with demand from both domestic and overseas sources reported to be firm. Despite easing further on April’s record, growth of new export orders was the third-strongest in the survey history. China remained a key source of demand, and growth was particularly strong in the Basic Metals and Electrical & Electronics sectors.

Further evidence of capacity pressures was signaled in June, with backlogs of work rising for a third successive month. Some panelists attributed this to insufficient personnel numbers and, encouraged by pipeline new business, chose to raise staffing levels at their plants. Net employment in the sector rose for a third successive month, although growth was only marginal and weaker than in May.

A number of panelists also noted some disruption to production arising from input delivery delays. Average lead times lengthened for a 10th successive month as global demand for raw materials continued to improve, leading to stock shortages and capacity constraints at vendors. Responding to their own higher output requirements, Japanese manufacturers raised purchasing activity for a fifth successive month.

In spite of production constraints and delivery delays, stocks of both purchases and finished goods increased in June.

Meanwhile, prices data showed that average input costs continued to increase, rising for a sixth successive month. The rate of inflation eased since May, but nonetheless remained marked. Companies reported higher prices for a range of metals and petroleum products in the latest survey period.

Despite another round of cost rises, Japanese manufacturers again chose to reduce their output charges in June. The rate of deflation was solid, albeit the slowest for 19 months. Competitive pressures and specific client requests for discounts were noted as factors leading to a decline in output charges.

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, economist of the Financial & Economic Research Center at Nomura, said: “The Japan Manufacturing PMI in June fell for the first time in five months, by 0.8 points to 53.9. However, it remains above the dividing line of 50 for the 12th consecutive month, suggesting that manufacturing operating conditions remain firm. The New Export Orders index, a leading indicator of Japanese exports, also fell 0.6 points, but it was still high at 56.9. The continued high level of new export orders suggests that exports will remain solid. While some have been concerned about the impact on the Japanese economy of financial market disruption triggered by the European fiscal troubles, so far that impact appears to have been small, and we expect Japanese manufacturing sector continue to improve for a while.”