Japan's huge manufacturing sector is going backwards as new orders dry up

  • Japan’s manufacturing sector remained weak in March.
  • Output levels fell at the fastest pace in three years as new orders from home and abroad declined.
  • The Bank of Japan and Japanese government have both downgraded their views on the Japanese economy in recent weeks.
  • Markets will receive a health check on the US and Eurozone manufacturing sectors on Friday.

Japan is the world’s third-largest economy, with strong trade ties to the rest of the world. Therefore, it’s usually a pretty good barometer for how the global economy is faring.

If the signals from its latest flash manufacturing PMI are any guide, there were few signs of improvement in March.

It held steady at 48.9 in March after adjusting for seasonality, indicating that activity across Japan’s manufacturing sector continued to weaken during the month.

As seen in the table below, the internal details of the report were not great.

IHS Markit

Output fell at the fastest pace in almost three years. Indicating there’s little prospect of a recovery in the months ahead, new orders fell at the sharpest pace since June 2016 while new exports orders — an indicator on global demand — also declined at a faster pace than a month earlier.

“Slack demand from domestic and international markets prompted the sharpest cutback in output volumes for almost three years,” said Joe Hayes, Economist at IHS Markit.

Hayes said manufacturers are “anticipating further troubles in the short-term”, keeping sentiment across the sector subdued.

“Concern of weaker growth in China and prolonged global trade frictions kept business confidence well below its historical average in March,” he said.

Today’s report will do little to improve sentiment towards the outlook for the Japanese economy.

Earlier this month, the Bank of Japan downgraded its assessment of exports and production, reflecting weak domestic and international demand. The Japanese government has also adopted a dimmer view, cutting its assessment on the domestic economy for the first time in three years this week.

This Nikkei-IHS PMI measures perceived changes in activity levels across Japan’s manufacturing sector from one month to the next. A figure above 50 signals that activity levels are improving while anything below suggests they’re deteriorating. The distance from 50 indicates how quickly activity levels are expanding or contracting.

The flash reading, released one week before the final PMI report, is based off around 85-90% of survey responses and is generally a pretty accurate guide as to how the final figure will print.

Flash manufacturing PMIs from the Eurozone and United States will also be released on Friday.

Like Japan, Europe’s manufacturing sector has been struggling in early 2019 with activity levels deteriorating for the first time since June 2013 in February. In contrast, activity at US manufacturers has been strong, helped by far stronger domestic economic conditions last year.

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