Japan’s manufacturing activity contracted at a slower pace in December as declines in production and new orders moderated, according to a private-sector survey released on Monday. The final au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) improved to 49.6 in December, marking the mildest contraction in three months. This was slightly above both the preliminary reading of 49.5 and November’s 49.0 but remained below the 50.0 mark, which separates expansion from contraction.
A lack of incoming new orders weighed on output, while inflationary pressure remained elevated due to high raw materials, energy costs, and the weak yen. Nevertheless, firms indicated that they continued to pass on higher prices to customers, suggesting that inflation will remain subdued for some time.
Overall, the PMI suggests that demand remains weak and that the recovery in the world’s third-largest economy is likely to be slow and fragile. This could dampen hopes that a series of wage talks will help offset the squeeze on consumers from high inflation, which is now at a 41-month peak, and help sustain the fragile post-pandemic recovery.
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The survey also pointed to a resumption in hiring in the sector, with manufacturers reporting a rise in employment for the first time since November. Nonetheless, a further slowdown in the expansion of output and exports was seen in the near term, reflecting worries about the global economic outlook.
The survey was conducted between Dec 20 and Jan 4. Companies reported that the weaker global economy and rising imports of components were among the main reasons for lower output in December, while price pressures also weighed on the production environment. Moreover, firms were concerned that the yen’s appreciation and higher crude oil prices would continue to pressure input costs. On the other hand, firms continued to signal that they were continuing to boost productivity by reducing work hours and focusing on quality control.
In addition, many manufacturers were increasing inventory levels to avoid further cost cuts. As a result, inventories grew at the fastest pace in nine months. However, the overall inventory level remained below the long-run average. The overall PMI index has fallen below the 50-mark for 10 straight months, marking the most prolonged spell of contraction since April 2020. This will likely add weight to expectations that the Bank of Japan will withdraw from its ultra-accommodative monetary policy settings in the coming years.