Japan’s massive manufacturing sector just took a turn for the worse

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Activity levels across Japan’s manufacturing sector contracted sharply in April, adding to the prospect that the Bank of Japan may add to its massive monetary stimulus program as early as next week.

The Nikkei-Markit flash manufacturing purchasing manager’s index (PMI) fell 1.1 points to 48.0 in April, taking the index back to the lowest level seen since January 2013.


A PMI measures changes in activity levels from one month to the next. Anything above 50 signals growth, while anything below that level means contraction — so the higher the number the better.

At 48.0, it’s not quite horrible, but close.

The flash estimate takes in responses from around 85-90% of survey responses, with the final PMI figure released on the first working day next month. Although revisions do occur, it’s rare that you get too much movement from the flash estimate to final PMI print.

Like the headline reading, the internals of the report were also underwhelming.

The table below, supplied by Markit, doesn’t make for particularly pleasant viewing. The phrase “decrease, faster rate” features regularly — not a great sign given they measure changes in activity levels.

The one exception to the rule was the surveys employment index, with hiring rates continuing to increase, something that fits with recent strength in Japanese labour market data.


Amy Brownbill, an economist at Markit, suggested that while international demand tanked during the month, the weakness may have also been as a result of two earthquakes that struck the island of Kyushu, a key manufacturing hub.

“Manufacturing conditions in Japan worsened at a sharper rate in April. Both production and new orders declined markedly, with total new work contracting at the fastest rate in over three years,” said Brownbill.

“The sharp drop in total new work was underpinned by the fastest fall in international demand since December 2012, and following the two earthquakes on the island of Kyushu, the outlook of the goods-producing sector now looks especially uncertain.”

Major earthquakes struck Kyushu on April 14 and 16, the middle of the survey period.

Although there is significant uncertainty over the April result, the weakness in the survey — along with other data outside of the labour market — could prompt the Bank of Japan to cut rates further into negative territory or add to its QQE program, or both, when it holds its next monetary policy meeting next week.