Japan's manufacturing sector just put in its strongest performance in nearly 4 years

Photo by Keith Tsuji/Getty Images

Japanese factories are humming, proving the first indication that the improvement across the global manufacturing sector in 2017 has continued in the early parts of 2018.

The Nikkei-IHS Markit flash manufacturing Purchasing Managers Index (PMI) rose 0.4 points to 54.4 in January, leaving it at the highest level in nearly four years.

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 54.4, activity levels not only improved at a faster pace in January, they did so at the fastest pace since February 2014.

Like recent PMIs from Europe, North America and many parts of Asia, that suggests the global manufacturing sector is in rude health in early 2018.

Helping to explain the strength in the headline PMI, almost all of the survey’s subindices improved in January, many of them at a faster pace.

The details can be found below.

Source: IHS Markit

Joe Hayes, Economist at IHS Markit, said the result signalled “further positivity” for the sector as it entered 2018.

“The strongest reading in the PMI since February 2014 was supported by quickened rates of output and employment growth, in addition to a relatively sharp expansion in new orders,” he said.

Not only that, along with improved levels of output and new orders, price pressures across the sector also intensified, an outcome Hayes says should help to lift inflationary pressures across the broader Japanese economy.

“Strikingly, output price inflation accelerated to the fastest rate since October 2008 amid sharper rises to input costs,” he says.

“With a low rate of unemployment and sustained growth in official GDP data, inflationary pressures should continue to mount.”

Following the release of Japan’s flash manufacturing report, markets will now focus on manufacturing PMI readings from the eurozone and US later in Wednesday’s session.

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