Manufacturing conditions in Japan worsened at a weaker pace at the start of the third quarter of 2016. Production decreased at the slowest rate since March, helped by a softer fall in new order intakes. Buying activity contracted further, while employment growth picked up slightly, albeit remained marginal overall. Meanwhile, the stronger yen/dollar rate weighed on international demand, with new exports declining at the strongest rate in three-and-a-half years.
The headline PMI posted 49.3 in July, up from 48.1 in June, thereby signalling a slower rate of deterioration in Japanese manufacturing conditions. Moreover, the latest reading was the highest since February 2016.
Contributing to the overall downturn in manufacturing conditions was a further fall in production. According to panellists, a reduction in foreign demand resulting from the appreciation of the yen led to a fall in output. However, the rate of contraction was only marginal and weaker than the average over the current five-month sequence of declines.
Similarly, new orders decreased at the slowest rate since February. Where total new work declined, surveyed companies mentioned falls in both domestic and international demand.
New exports orders contracted for the sixth month running in July. In fact, the rate of decline was the sharpest since January 2013. Firms linked a reduction in trade volumes to terrorism, European economic demand weakness and a loss of global competitiveness resulting from the appreciation of the yen against the dollar. All three market groups signalled contractions in foreign demand, with intermediate goods producers recording the most marked fall.
Despite worsening conditions, manufacturers hired additional workers in July. However, the rate of job creation was weaker than the average over the current ten-month sequence of growth.
On the price front, input prices declined at the sharpest rate in nearly four years. Lower cost burdens were attributed by firms to a fall in imported raw material prices stemming from a stronger yen/dollar rate. As a result, charges were reduced at the fastest pace since January 2013.