Japan's manufacturing sector lost a bit of momentum in October

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Japan’s manufacturing sector remains solid if not spectacular with activity levels improving at a slightly slower pace in September compared to the month earlier.

The latest Nikkei-IHS Markit flash manufacturing purchasing managers index (PMI) came in at 52.5 in October, down marginally on the 52.9 level of September.

This PMI measures perceived changes in activity levels across Japan’s manufacturing sector from one month to the next.

Anything above 50 signals that activity levels are improving while a reading below suggests that they’re deteriorating. The distance from 50 indicates how quickly activity levels are expanding or contracting.

The flash reading from IHS Markit, 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.

Source: IHS Markit

IHS Markit said that output and new orders both grew at a slightly slower pace than September, fitting with the moderation in broader activity levels.

Those weaker readings offset a pickup in hiring levels and an increase in order backlogs, suggesting there’s still a fair degree of orders still in the pipeline despite the slight moderation in new orders over the month.

Stocks of finished goods also declined, suggesting that end-user demand remains firm.

For inflationary pressures across the sector, of importance given Japan’s constant battle against deflationary forces over the past three decades, IHS Markit said that input prices rose at the same rate as September while prices for finished goods rose at a slightly faster rates.

This suggests a modest easing of margin pressures, at least in the near-term.

Fitting with the mixed October report card, confidence levels as manufacturers, while still positive, fell to the lowest levels seen in 11 months.

“Although still improving solidly, the Japanese manufacturing sector appeared to lose some momentum in October, as growth eased from September’s four-month high,” said Joe Hayes, Economist at IHS Markit.

“Softer expansions were seen for both output and new orders. Meanwhile, firms continued to largely absorb cost pressures, with output price inflation only marginal again in October.”

Hayes said that the slowdown in activity levels led to the decline in optimism reported in October.

Following the release of the Japanese PMI report, market attention will now turn to flash readings on manufacturing and services that will be released for the Eurozone and United States later in today’s session.

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