- Japan is a large, export-orientated economy, making it as good a guide to evaluating the strength of global demand.
- In October, export orders placed at Japanese manufacturers increased for the first time in five months.
- Stronger demand from abroad contributed to activity levels improving at the fastest pace since April.
Financial markets just received a potentially important signal on the health of the global economy.
For the first time in five months, new export orders placed at Japanese manufacturers increased in October, according to the latest Nikkei-IHS Markit “flash” manufacturing purchasing managers index (PMI).
“Export sales rose for the first time since May, despite several respondents highlighting problems arising from global trade tensions,” said Joe Hayes, Economist at IHS Markit.
While only one indicator for one particular month, the increase is noteworthy given Japan is a large, export-orientated economy, making it a good indicator to gauge the current strength of global demand.
The lift in demand from abroad saw broader activity levels improve across the sector from September.
“The latest survey indicated stronger expansions in all the key barometers of macroeconomic health, with output, new orders and employment growth quickening since September,” Hayes said.
“Following a rather disappointing slew of PMI data over the third quarter, Japan’s manufacturing sector looks set to start Q4 on a more upbeat note.”
However, he cautioned that weather disruptions in previous months may have impacted the result, meaning a similar outcome in November will be required to have greater confidence that the recent downturn is over.
“Next month’s data will be important to assess whether the latest growth rebound is a transitory response to weakness resulting from recent natural disasters,” Hayes said.
The flash PMI rose to 53.1 in October, up from 52.5 in September, leaving it at a 6-month high.
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, 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 and services PMIs from the Eurzone and United States will be released later Wednesday. Should a similar lift in new export orders be seen in those reports, it will help to ease concerns about the economic impact of an escalation in trade tensions between China and the United States.