The Japanese manufacturing sector ended 2016 on a positive note. Overall operating conditions improved at the sharpest rate since December 2015, helped by stronger growth in both production and new orders. As a result, goods producers were more confident towards taking on additional workers, with the rate of job creation picking up to a 32-month high. Buying activity also rose at the quickest rate in nearly one year.
However, cost inflationary pressures continued to build, with input prices increasing at the fastest rate since July 2015.
The headline PMI posted 52.4 in December, up from 51.3 in November, signalling a sharper improvement in manufacturing conditions in Japan. In fact, the latest reading was the highest since December last year and contributed to the strongest quarterly average since Q4 2015. The higher figure reflected increases in output, new orders and employment.
Production at Japanese manufacturers rose for the fifth consecutive month. Moreover, the rate of expansion was the sharpest registered during 2016. According to panellists, new product launches and greater new work inflows contributed to the rise in output. All three sub-sectors registered production growth, with intermediate goods producers noting the strongest increase.
A stronger expansion in production was matched by a faster increase in new orders during December. New order growth accelerated to a 12-month high, with a number of firms mentioning improved advertising campaigns. Also contributing to the rise in total new orders was an increase in international demand, with new export orders expanding for the fourth month running. Panellists commented on greater trade volumes with Europe, China and North America.
Concurrently, goods producers continued to add to their payrolls and at the quickest rate since April 2014.
On the price front, reports of greater raw material prices, particularly for oil- and metal- related items, stemming from the weakness of the yen led to a sharper increase in input costs. Meanwhile, charges broadly stabilised.
Amy Brownbill, economist at IHS Markit:
The Japanese manufacturing sector ended 2016 on a good footing, with both production and new orders expanding at the sharpest rates seen over the year. The stronger PMI data are in line with the IHS forecasts for IP growth in November and December, with the annual rate of expansion set to hit 3.8% by the end of the year. Manufacturers were also more optimistic towards taking on additional workers, with job creation ticking up to a 32-month high.
However, input prices increased at the sharpest rate since July 2015, with panellists mentioning the recent weakness of the yen driving up imported raw material costs.