Japan’s manufacturing sector is slowing down after a strong start to the year

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Japan’s massive manufacturing sector grew at the slowest pace in July since late last year, according to data released by IHS Markit today.

The group’s flash manufacturing Purchasing Managers Index (PMI) fell to 52.2 from 52.4 in June, leaving it at the lowest level since December last year.

The PMI measures 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 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.

At 52.4, it indicates that while activity levels improved in July, they did so at the slowest pace in eight months.

Mirroring the slowdown in the headline PMI, most of the surveys subindices improved at a slower pace than a month earlier.

Source: IHS Markit

The output subindex fell to 51.4 from 52.2 in June, leaving it at the lowest level in 10 months.

New orders also grew at a slower pace while new export orders were unchanged from the levels of a month earlier.

“The slowdown was driven by stagnation in export orders, amid reports of weaker demand from Southeast Asian markets,” said Paul Smith, senior economist at IHS Markit.

As a lead indicator, the moderation in new order growth points to a continued deceleration in activity levels in the months ahead.

Order backlogs also declined while input and output prices — the cost of raw materials and prices paid for finished goods — also grew at a slower pace than a month earlier.

Stocks of raw materials and finished also declined from June, fitting with the broader slowdown in activity levels across the sector.

However, firms continued to add staff at a decent clip while expectations for the future hit the highest level on record, suggesting that many firms believe the recent moderation in activity levels is unlikely to become entrenched.