Japanese manufacturing sector contracted for third successive month

Operating conditions continued to deteriorate in the Japanese manufacturing sector in November, as a further reduction in new business led to another decline of output. Employment fell further, with data pointing to the fastest rate of job shedding for 12 months. Meanwhile, deflation of factory gate prices strengthened in November, with output prices falling solidly amid continued strong competition for new business. This occurred despite a solid increase in average cost burdens.

The headline seasonally adjusted Nomura/JMMA Purchasing Managers’ Index (PMI) posted 47.3 in November, up fractionally from October’s 17-month low of 47.2. The index was at a level indicative of a solid deterioration in Japanese manufacturing sector operation conditions.

Manufacturing output fell for the second month running in November, decreasing at a moderate rate that was the fastest since April 2009. Underpinning the latest decline was a further reduction in new business, which fell markedly since October. Where a decrease in new work was indicated, panelists generally linked this to poor demand conditions.

New export orders also fell in November, with the rate of decline quickening to the fastest in 19 months. Respondents cited the strength of the yen as a principal driver of the latest decline. Reduced new order intakes from China were also mentioned.

Backlogs of work fell further in November, largely as a result of falling new business and corresponding spare capacity. The rate of contraction was solid, and the second-fastest since May 2009.

Employment fell for the fourth month running in November, with the rate of job shedding quickening to the fastest in a year. Respondents that reported a decline in staff numbers often linked this to an increased number of employee retirements.

Output prices set by Japanese manufacturing firms fell solidly in November. Anecdotal evidence suggested that firms reduced their factory gate charges in an attempt to attract new business amid strong competition, which in part reflected adverse exchange rate factors.

In contrast, average input costs rose for the first time in three months during November, with the latest increase the fastest since June. Prices paid for copper, chemicals, petroleum and steel were all reported as having risen since October. Shortages of raw materials were also cited as a key driver of inflation in the latest survey period.

Reduced purchasing was recorded for the third month running in November. The rate of decline was solid, and accelerated to the sharpest since April 2009. As a result, the pace at which average vendor performance deteriorated was only slight, and much slower than the average for 2010 so far.

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Kohei Okazaki, economist at Noruma’s Financial & Economic Research Centre, said: “The Japanese Manufacturing PMI in November increased 0.1 points to 47.3. This is the first month that the index stopped declining in six months, but the level is still beneath 50.0, which is the threshold of growth and contraction. Looking at the main indices, though the New Orders Index rose 0.4 points, the Output, New Export Orders and Employment indexes all decreased (-0.3 points, -1.5 points, -0.4 points, respectively). In the past two months, the New Export Orders Index has posted below 50.0 and its level is now 46.9 points. Real exports in GDP statistics were already showing a slowdown in July to September, and this trend appears to have persisted in October to November.”