Japan’s manufacturing sector deteriorated at the fastest pace in three months, starting the fourth quarter of 2024 slower as both output and new order inflows decreased at sharper rates. While the pace of decline in the former was only marginal, it was the most pronounced for six months. Manufacturing performance was also weaker due to a broad stagnation in employment levels, a renewed fall in purchasing activity, and a steeper depletion of backlogs.
On the price front, input costs across Japan’s manufacturing sector continued to rise but at the softest since April. Despite this, manufacturers raised their selling prices to the greatest extent in three months.
Reaching 49.2 in October, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) fell from 49.7 in September, indicating a sharper deterioration in the health of the sector.
“Firms often mentioned weakness in domestic and global demand had weighed on sales and output, notably in semiconductors and autos,” stated Usamah Bhatti at S&P Global Market Intelligence.
Weaker demand impacts growth
Japan’s manufacturing sector output fell for the second consecutive month in October. While only marginal, the decline was the most prominent since April. Survey participants cited weaker new orders, while there was also evidence that firms had excess inventories. In addition, stocks of finished goods also fell further and at the strongest rate since February. Overall new orders fell for the 17th month in a row in October at a moderate pace.
Participants also cited a decline in demand, noting that it was a key factor behind the fall, notably in the automotive and semiconductor sectors. International demand was also weaker as manufacturers noted the sharpest fall in new export business since March, with particular emphasis on weak demand from the U.S. and mainland China.
Input prices rise
Japan’s manufacturing sector also witnessed an increase in input prices last month amid higher raw material, labor, and utility prices. That said, the rate of inflation was the softest since April. Despite the slight softening in inflation, manufacturers raised selling prices at a stronger rate in three months in October.
“The weakness protruded into further metrics of the survey, with goods producers signaling a renewed fall in purchasing activity and broad stagnation in employment levels,” added Bhatti.
In line with the trend for new orders, Japan’s manufacturing sector redirected capacity to the completion of outstanding business in October. The rate of depletion of backlogs was sharp and the steepest in seven months. Moreover, firms signaled a broad stagnation in job creation amid weaker capacity pressures.
Read: Bank of Japan keeps interest rates unchanged at around 0.25 percent
Future outlook
Optimism toward the year ahead for output remained positive across Japan’s manufacturing sector but was little changed from September’s 21-month low. Confidence remained steady amid expectations of a recovery in semiconductor and auto sector demand, in addition to new product launches and improved global economic conditions.
“The near-term outlook is clouded, as firms increasingly worked through backlogs of work, a sign that new order inflows are not enough to sustain production. Moreover, confidence was little changed from the near-two-year low seen in September, as firms highlighted concern regarding the timing of the recovery from the current economic malaise,” added Bhatti.
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