Japan’s manufacturing economy edged closer to stabilization in August. There was a more moderate and modest decline in new orders, while output returned to expansion territory for the second time in three months. Moreover, companies reported an increase in input purchases for the first time since July 2022 amid additional production requirements. Employment growth also rebounded during the month, although the level of outstanding work continued to slow sharply. On the price front, input price inflation strengthened to a 16-month high as raw material prices continued to rise and the exchange rate weakened.
The Jibun Bank of Japan’s manufacturing Purchasing Managers’ Index (PMI) – a single-digit composite measure of manufacturing performance – came in at 49.8 in August, up from 49.1 in July and signaling a partial contraction in the health of Japan’s manufacturing sector. , The latest data showed a renewed increase in output in August, the second in the past three months. Growth was modest, but at its highest level since May 2022.
Companies also indicated a softer preference for using existing inventories, with the rate of accumulation stagnating during the month. There were also reports of an improvement in new order volumes, which fell again in August albeit at a weaker rate than seen in July. Meanwhile, new export volumes fell at a strong rate, the most pronounced since March, amid evidence of weaker demand from key export markets including mainland China and South Korea. Against the backdrop of higher production and a slowdown in demand, purchasing activity rose for the first time since July 2022. However, the rise was only marginal. Meanwhile, purchase inventories fell slightly for the second month in a row. Japanese manufacturers indicated that supplier performance had improved, as evidenced by shorter lead times for the third time in the past five months.
Companies responded by raising their own prices
Availability of goods was generally better, particularly for electronics. However, price data showed that input price inflation picked up in August. Input prices rose to their sharpest since April 2023. A weak yen and high raw material prices were cited as the main sources of inflation. Firms responded by raising their own prices, albeit at the weakest rate since June 2021. ,Confidence in the future gained momentum in August, and has remained relatively high in the context of the survey’s history. Firms have generally expected a stronger domestic and global economic recovery.
The overall degree of optimism was strong. This outlook was partly explained by the sustained increase in employment. The rate of job growth was modest but gained momentum from the rate seen in July. The additional capacity may mean that firms were able to comfortably keep up with overall workloads, as evidenced by another strong decline in backlogs of work.
Commenting on the latest survey results, Usama Bhatti of S&P Global Market Intelligence said: “The latest PMI data painted a mixed picture of Japan’s manufacturing performance in the middle of the third quarter. The headline reading was close to stabilizing in August amid a renewed rise in output and a more moderate decline in new order orders. Firms also reported hiring additional staff while inventory-reduction efforts appeared to have slowed. There were also signs of improved supplier performance as manufacturers reported more readily available inputs, particularly electrical components.
Meanwhile, price data remained stubbornly high in August, providing further evidence of rising inflation amid reports of widespread input price increases. However, firms have chosen not to pass on the full burden of higher costs to customers in an effort to remain competitive, with the rate of charge inflation the least pronounced since mid-2021.”
Jibbon Bank Manufacturing PMI in the Spotlight
The final manufacturing PMI figures on Monday, September 2, could impact the USD/JPY pair. According to the preliminary survey, the Jibun Bank Manufacturing PMI rose to 49.5 in August from 49.1 in July.
A reading above 50 could boost demand for the Japanese yen. The manufacturing sector accounts for about 20% of Japan’s economy. A stronger manufacturing sector could boost Japan’s economy, raising expectations for a rate hike by the Bank of Japan in the fourth quarter of 2024.
“The preliminary PMI data for August indicated that the robust expansion in business activity at Japanese private sector companies continued in the middle of the third quarter of 2024. The growth was supported by an acceleration in the expansion of services activity, while industrial output returned to growth after a brief dip in July.”
“The surprise rise in Tokyo inflation in August will catch the attention of the Bank of Japan, and we believe this will put a rate hike on the table at the October meeting. The report provides clear evidence that strong wage increases are fueling consumer prices.” The rise in the Jibun Bank manufacturing PMI and speculation of a BoJ rate hike in Q4 2024 could push USD/JPY below 145.
Later in Monday’s session, investors should follow the comments from the Federal Reserve. Comments on the US labor market, inflation, and the Fed’s interest rate path could weigh on demand for the US dollar. According to market expectations, investors expect the Fed to cut interest rates by 25 basis points in September. The Fed’s support for a 50 basis point rate cut to support the US labor market could signal a drop in USD/JPY below 145.
