Japan’s Factory Activity Declines

TOKYO (Reuters) – Japan’s factory activity slumped to the lowest level in 10 months due to sluggish demand, though the service sector strengthened further in January, preliminary business surveys showed on Friday.

The results underline the service industry’s crucial support for the economy, continuing to anchor growth despite a struggling manufacturing sector.

The au Jibun Bank flash Japan manufacturing purchasing managers’ index (PMI) dropped to 48.8 in January from 49.6 in December. The index has remained below the 50.0 threshold separating expansion from contraction since June of last year.

> “The expansion in private sector business activity remained service-led,” said Usamah Bhatti, economist at S&P Global Market Intelligence, which compiled the surveys.

The country’s manufacturing sector has been under pressure for months due to subdued demand in both domestic and major overseas markets. December’s trade data reported a decline in exports to Japan’s two largest trading partners, falling 3% to China and 2.1% to the United States.

This downturn was reflected in the PMI survey, which indicated that manufacturing output dropped at its steepest pace since last April, while new order inflows fell to their slowest rate in six months.

Nevertheless, the Bank of Japan is expected to raise interest rates to 0.50% from 0.25% on Friday.

Analysts suggest that strong domestic wage momentum and price pressures support the case for a rate hike this week. The BOJ also indicated this month that wage hikes are becoming common across firms of all sizes and sectors, signalling conditions for a near-term hike continue to align.

Input inflation in the manufacturing sector eased slightly in January, leaving output prices unchanged from the previous month. Stocks of finished items rose for the first time since last July, as businesses anticipate a recovery in demand.

Meanwhile, the au Jibun Bank flash services PMI jumped to 52.7 in January from 50.9 in December, boosted by an increase in new businesses.

Despite average input costs rising at the highest rate since last August and new export businesses expanding for the first time since September, price-charged inflation and business sentiment largely remained stable.

The au Jibun Bank flash Japan composite PMI, which combines both manufacturing and service sector activity, increased slightly to 51.1 in January from 50.5 in December.