Japan's manufacturing sector is purring like a well-oiled machine

Photo by Rusty Jarrett/Getty Images
  • Activity levels continue to improve across Japan’s mammoth manufacturing sector
  • Employment grew at the fastest pace in 11 years in February
  • Markets will receive PMI reports on manufacturing and services from the US and Eurozone later today

Japan’s manufacturing sector was purring like a well-oiled machine in February, according to data released today.

The Nikkei-IHS Markit flash manufacturing Purchasing Managers Index (PMI) came in at 54.0 points in February, pulling back slightly having hit a four-year high in January.

This PMI measures changes in perceived 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 away 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.

That means that at 54.0, activity levels still improved in February, just at a slightly slower pace.

As seen in the table below, all activity subindices aside from inventories of finished goods increased over the month, especially the employment gauge which jumped to an 11-year high.

Source: IHS Markit

Put another way, hiring in the sector hasn’t risen this quickly since before the global financial crisis.

New orders, new export orders and order backlogs — lead indicators for the sector — all grew at a slightly slower pace, hinting that activity levels may moderate in the months ahead.

Input and output prices also grew at a slower pace, pointing to a moderation in price pressures over the month.

Joe Hayes, Economist at IHS Markit, described the report as a “fairly mixed bag overall”.

“On the one hand, output and new business inflows increased to weaker extents, while recent yen appreciation has coincided with slower new export order growth.

“Furthermore, a number of panellists indicated that the stronger currency had prompted them to lower prices to overseas customers. Indeed, further yen strengthening will create unwanted drag on inflationary pressures.

“That said, employment growth accelerating to an 11-year high signals confidence that expansionary output and demand trends will continue for the time being.”

Following the release of Japan’s flash report, markets will receive separate manufacturing PMI readings from the US and Eurozone later in today’s session.

Like Japan, they’ve been impressive recently, helping to build confidence that global economic conditions continue to strengthen.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.