***JAPAN WATCH

Operating conditions at Japanese manufacturers improved further mid-way through the final quarter of 2016. Production increased at a slightly slower pace, albeit one that remained stronger than the long-run series average. This was driven by new order growth, which picked up to a ten-month high. Consequently, buying activity picked up slightly. In contrast, employment growth eased to the weakest in three months. Meanwhile, on the price front, input prices and charges remained broadly unchanged from October.

The headline PMI posted at 51.3 in November, little-changed from October’s 51.4 (the highest reading since January), thereby signalling a solid improvement in manufacturing conditions in Japan. Furthermore, the latest reading was higher than the long-run series average.

Production at Japanese manufacturers rose for the fourth month running during November. Although slowing from October’s ten-month record, the rate of expansion was quicker than the average observed this year so far. According to anecdotal evidence, the opening of new business facilities, new product launches and a rise in international demand helped to boost output. At the sector level, both intermediate and investment goods producers noted production growth.

Total new orders also increased in November. In fact, the rate of expansion was the most marked since January. Similar to production, panellists mentioned greater demand resulting from new product launches as well as improved advertising as factors behind the rise in incoming sales.

Greater foreign demand also contributed to the expansion in total sales, with new export orders increasing for the third successive month. The rate of growth eased, but was nevertheless stronger than the historical average. Firms mentioned the securing of trade partners and greater sales to Taiwan.

Reflecting improved conditions, manufacturers increased their buying activity in November. However, the rate of expansion was only slight overall.

Finally, input prices broadly stabilised, following a ten month sequence of decline. Selling prices also remained broadly unchanged from October.

The flash Nikkei Manufacturing PMI, compiled by Markit, edged lower from 51.4 in October to 51.1 in November, but that was still the second-best reading seen since January.

Output and new order growth slowed in November, but in both cases the expansions were the second-best recorded over the past ten months. Similarly, the employment index pulled back from the 30-month high reached in October but still signalled a welcome modest net increase in factory headcounts.

Key to the expansion has been an improvement in export performance. The survey’s index of new export orders signalled an increase in overseas sales volumes for a third successive month in November, halting a seven-month spell of continual decline.

The upturn in overseas sales reflected a combination of factors, including the recent weakening of the yen against the US dollar, reviving demand in many export markets, as well as supply chains returning to normal after earthquakes earlier in the year.

Domestic demand remained disappointingly weak, however, meaning the overall order books rise was in fact only very modest.