Japan’s Factory Activity Sees Slower Contraction in August

TOKYO (Reuters) – Japan’s factory activity contracted at a slower pace in August thanks to a recovery in output and new orders, as indicated by a private-sector survey on Monday. This offers some hope for an economy that is starting to stabilize.

The final au Jibun Bank Japan manufacturing purchasing managers’ index (PMI) rose to 49.8 in August from 49.1 in July, after also being up from the 49.5 reported in the flash reading. However, it remained below the 50.0 threshold separating growth from contraction for two consecutive months.

Usamah Bhatti at S&P Global Market Intelligence stated, “The headline reading came close to stabilization during August amid a renewed rise in production and a softer fall in new order intakes.”

The output subindex expanded in August, reaching its highest level since May 2022, recovering from contraction experienced in July. This recovery is credited to an increase in new orders and the mass production of new products.

New orders, however, shrank modestly due to weak demand from both domestic and overseas markets, although the rate of decline slowed compared to July. Some firms noted issues with overstocking and weak client investment.

Sluggish demand from key export markets, particularly China and South Korea, contributed to a contraction of new exports to the lowest level in five months.

This weaker overseas demand raises concerns for policymakers, but a rebound in domestic consumption has lent support to the economy, leading to expectations that the Bank of Japan will continue increasing interest rates as it moves away from a decade-long massive stimulus program.

The PMI indicated that input prices rose to their highest level since April 2023, driven by a weaker yen and the increasing costs of raw materials, fueling inflation—a critical issue for policymakers amid household pressures from rising living costs.

Despite this, firms increased output charges to customers, albeit at the softest rate since June 2021.

“Prices data remained stubbornly high in August, providing further evidence of inflation picking up amid reports of a broad-based rise in input prices,” noted Bhatti.

Nevertheless, manufacturers are optimistic about their business outlook, expecting increases in sales and demand in sectors like automotive and semiconductors. Many anticipate a general recovery in demand and economic growth, which provides hopeful signs for BOJ policymakers as they navigate monetary policies in the upcoming year.