Japanese manufacturers enjoyed a strong end to 2016 as production and new orders surged

Photo by Koichi Kamoshida/Getty Images

Japan’s massive manufacturing sector ended 2016 on a strong note with operating conditions improving at the fastest pace seen in a year.

The Nikkei-Markit manufacturing purchasing managers index (PMI) rose to 52.4 in December, the highest level seen since the same month in 2015.

It was also above the 51.3 level of November and an improvement in the “flash” PMI estimate of 51.9 released in late December which accounts for around 85% to 90% of all firms surveyed.

A PMI measures changes in activity levels across Japan’s manufacturing sector from one month to the next, with a reading above 50 indicating that activity levels were strengthening.

At 52.4, it suggests a modest improvement in activity levels occurred in December, a stark turnaround from conditions earlier in the year where activity levels were deteriorating.

Markit said that the headline PMI reading was helped by stronger readings on production and new orders.

“Production at Japanese manufacturers rose for the fifth consecutive month,” the group said, adding that the rate of expansion was the sharpest seen over the entirety of 2016.

“According to panellists, new product launches and greater new work inflows contributed to the rise in output,” it said.

Suggesting that positive momentum may be sustained in the months ahead, Markit said that the stronger expansion in production was matched by a faster increase in new orders.

“New order growth accelerated to a 12-month high, with a number of firms mentioning improved advertising campaigns,” it said.

“Also contributing to the rise in total new orders was an increase in international demand, with new export orders expanding for the fourth month running.”

Markit said panellists noted greater trade volumes with Europe, China and North America, fitting with the view that global economic activity was picking up heading into 2017.

Fitting with strengthening demand and production, firms increased their staffing levels at the fastest pace seen since April 2014 over the month.

There was also mixed news on the inflation front, with weakness in the Japanese yen and higher commodity prices — particularly for oil and metals — saw input prices increase at a faster pace.

While good news for inflationary pressures, firms were unable to pass on those increases for the prices for finished goods which were broadly stable during the month.

This suggests that production margins were squeezed during the month, impacting the profitability of firms.

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