Employment growth in Japan in February hits 11-year high – Manufacturing PMI
The health of the Japanese manufacturing sector continued to improve during February, sustaining an upward trend that has been apparent for the past 18 months. A broad-based rise in new orders underpinned a solid upturn in production and an 11 year high in the rate of job creation. However, firms noted difficulties in acquiring additional raw materials due to shortages and delayed deliveries. In turn, backlogs of work increased, prompting firms to use inventories to meet demand. Input costs rose sharply in February, encouraging firms to raise selling charges to a relatively marked extent. The headline Nikkei Japan Manufacturing Purchasing Managers IndexTM, a composite single-figure indicator of manufacturing performance, edged slightly lower to 54.1 in February, from 54.8 in January. This was consistent with a solid, albeit weaker, rate of improvement in business conditions for Japanese manufacturers.
Output continued along an expansionary path during February, however the rate of growth slowed for the first time since July 2017 to a four-month low. Nonetheless, firms increased production during February in line with greater new business inflows. New order growth was strong overall, despite easing. Similarly, new business from abroad rose to a weaker extent following January’s 92-month high. China and the US were cited as sources of foreign demand.
With the upturns in output and new orders continuing, firms enhanced operating capacities by taking on more staff in February. In fact, the rate of job creation accelerated to an 11-year high. Firms noted that forecasts of further output growth had encouraged them to increase employment. That said, higher staff levels did not prevent backlogs of work from rising. Anecdotal evidence suggested that greater volumes of new business and delayed deliveries from suppliers had been contributing factors. Average lead times lengthened markedly in February and to the sharpest extent in 81 months, signaling intensified pressures on supply chains. Robust demand conditions also forced firms to use post-production inventories to fulfill incoming orders.
Amid difficulties in obtaining inputs from suppliers, firms raised their stocks of purchases. The rate of accumulation quickened marginally to the joint- fastest pace in 25 months, on a par with May 2017.
On the price front, input costs increased sharply and for a sixteenth consecutive month. Higher prices for oil related products were widely reported by panelists. That said, the rate of inflation softened on that seen in January. Consequently, firms raised selling prices in an effort to pass part of the higher cost burden onto their customers. The rate of output price inflation, albeit weaker, remained relatively strong.
Manufacturers retained an optimistic outlook towards output over the coming 12 months. Expectations of a stronger Japanese economy, Olympic-Games related demand and new client wins were all cited as reasons to be confident.
Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said “The trend of building momentum in the Japanese manufacturing sector came to an end in the latest PMI survey period. Output growth slowed for the first time since July 2017, while both domestic and foreign demand rose to lesser extents. Nonetheless, sentiment in the sector remained upbeat, as firms hired additional staff at the quickest rate in 11 years amid expectations that the Japanese economy would continue along an expansionary path. The PMI Output Prices Index, despite falling, signaled a relatively sharp rate of inflation during February. A combination of supply-side pressures, particularly raw material shortages and prolonged delivery times, and strong demand supported firms to raise factory gate charges. That said, the marked year-to-date appreciation of the yen could provide downward cost pressures for manufacturers, opening the door for disinflation to creep in to consumer prices, particularly if demand pressures ease further.”
Source : Strategic Research Institute