Operating conditions at Japanese manufacturers deteriorated at the end of the first quarter of 2016. Production declined for the first time since April last year, led by a modest fall in new orders. Underpinning the decrease in total new work intakes was a sharp contraction in international demand.
Consequently, goods producers were cautious towards their hiring policies, with the rate of job creation easing to a six-month low. Meanwhile, input prices declined at a quicker rate enabling firms to reduce their selling prices further.
The headline PMI posted 49.1 in March, down from 50.1 in February, thereby signalling worsening manufacturing conditions in Japan. Although a modest contraction, the latest reading was the lowest for over three years.
New orders at Japanese manufacturers decreased for the second month in a row. Moreover, the rate of contraction was the sharpest in nearly two years. Data suggested that the primarily contributor to the decline in total new work intakes was a sharp drop in international demand, as new export orders decreased at the fastest rate since January 2013. A number of the survey panel blamed instability in the wider Asian economy (particularly China and Taiwan) as the key factor behind the fall in overseas trade.
Subsequently, production contracted for the first time since April 2015. Although marginal, output has only fallen five times in the past two years. Deteriorating operating conditions meant goods producers were less confident about hiring additional workers, with the rate of job creation easing to the weakest in the current six-month sequence of employment growth. Manufacturers also cut back on input buying for the first time in six months. Furthermore, the rate of decline was the sharpest in nearly two years.
Meanwhile, as a consequence of a reduction in production and a drop in new orders, less pressure was placed on suppliers and lead times shortened to the greatest extent since December 2012.
On the price front, reduced raw material costs, particularly oil and metal-related items led to a fall in input costs. Therefore, manufacturers were able to reduce their charges to a greater degree. Firms also mentioned client negotiations and competition driving down selling prices.