Manufacturing operating conditions in Japan worsened at the end of the second quarter of 2016. Production declined for the fourth month running, led by a drop in new orders. Underpinning the fall in total new orders was a sharp contraction in international demand, with new exports decreasing at the same rate as May’s 40-month record. As a result, employment growth slowed and was only marginal overall. Buying activity was also cut back and at the quickest rate in over two years.
On the price front, input prices declined, albeit at only a marginal rate. Meanwhile, charges fell at the sharpest rate since February 2013.
The headline PMI posted 48.1 in June, up from 47.7 in May, signalling a slightly slower rate of deterioration in operation conditions at Japanese manufacturers. However, the latest reading contributed to the lowest quarterly average since Q4 2012.
Contributing to the overall worsening in operating conditions was a fall in production. According to panellists, a decline in new orders from both domestic and international clients led to a reduction in output. Some firms also mentioned the earthquakes that occurred back in April as still having a negative effect on manufacturing production.
A fall in output was matched by a decline in new orders in June. A key driver behind the fall in total new orders was a marked drop in international demand. Evidence suggested that, due to the appreciation of the yen against the dollar, global competitiveness was reduced which led to a decrease in trade volumes.
Consequently, manufacturers were cautious towards their hiring policies, with the rate of job creation slowing to the weakest rate in the current nine-month sequence of expansion. Goods producers also cut back on their buying activity for the fourth consecutive month.
With a slump in demand, less pressure was placed on capacity and volumes of unfinished work were depleted. Stocks of post-production items were also
reduced, albeit at only a fractional rate.
Meanwhile, the higher yen against the dollar drove down raw material prices and led to a fall in cost burdens. Subsequently, charges declined at the quickest rate in over three years.