Japan's manufacturing sector is slowing down

TORU YAMANAKA / AFP / Getty Images

Activity levels across Japan’s manufacturing sector grew at the slowest pace in seven months in June.

The Nikkei-IHS Markit flash manufacturing Purchasing Managers Index (PMI) fell to 52.0 from 53.1, leaving it at the lowest level since December last year.

Source: IHS Markit

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.

That means that at 52.0, while activity levels continued to improve in June, they did so at a slower pace than May.

Not a bad outcome by any stretch, but weaker than what had been seen earlier in the year.

This table from IHS Markit shows how individual components fared in the June survey.

Source: IHS Markit

Indicative of the slowdown in the headline index, the improvement across most categories was weaker than what was reported in May with output levels growing at the slowest pace seen in nine months.

Indicative a weakening demand, new domestic and export orders also grew at a slower pace while backlogs of work and stock purchases deteriorated.

As a result, employment growth also eased back slightly.

The one exception to the weakening rule came from inflationary pressures with input costs and those for finished goods both rising at a faster pace. Costs in the latter rose at the fastest pace in close to three years.

Perhaps those inflationary forces the Bank of Japan are trying so hard to muster are finally starting to be felt.

Paul Smith, senior economist at IHS Markit, said the June reported reflected “softening” conditions across the sector.

“Slower growth was signalled in June, with both orders and output rising at the weakest rates since late last year amid reports of a slight softening in market conditions,” he said following the release of the report.

“That said, external demand is holding up well, and the sector continues to operate within a solid growth range. This is helping support employment gains, whilst also enabling firms to pass costs on to clients to the greatest degree in over two-and-a-half years.”

The PMI report suggests that the rollicking annualised growth in Japanese imports and exports, leaving both at the highest levels seen in several years in percentage terms, may slow in coming months.

It also suggests that the positive momentum in the Japanese economy, something that saw the government upgrade its assessment only yesterday, may be also starting to ebb.

Following Japan’s manufacturing report card, all attention will now turn to PMI reports from Europe and the US that will be released later this evening.

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