Japan’s Manufacturing Activity Contracts for Third Straight Month, Services Sector Still Growing

Japan’s manufacturing activity contracted for a third straight month in January, as export weakness persisted amid a worsening global outlook. The au Jibun Bank flash Japan manufacturing purchasing managers’ index (PMI) was at a seasonally adjusted 48.9 in January, unchanged from the final reading in the previous month.

The contraction of factory activity is a concern for policymakers, who had hoped that key wage talks in the months ahead would offset the squeeze on consumers from 41-year-high inflation and help sustain the fragile post-pandemic recovery. However, the continued weakness in manufacturing activity clouds these hopes. The factory production index stayed below the 50-line that separates contraction from expansion for a third straight month, after December’s final figure marked the fastest fall in 26 months.

Factory output and new orders decreased for a seventh consecutive month, although at slower paces than last month, according to sub-index data. This decline is a concern, as it indicates that manufacturers are still struggling with weak external demand and rising costs. By contrast, service-sector activity extended growth for a fifth month, thanks to a tourism boom and relaxation of COVID-19 curbs.

A Divergence Between Manufacturing and Services Sectors

The divergence between the manufacturing and services sectors has become more pronounced in recent months. While manufacturing activity continues to contract, services sector activity remains strong. This is reflected in the au Jibun Bank flash services PMI, which rose to a seasonally adjusted 52.4 in January from the previous month’s 51.1 final reading, hitting a three-month high.

Services operators were less optimistic about the outlook, with a business sentiment sub-index hitting the lowest in 24 months. While input prices rose at a faster pace than the previous two months, output price inflation was the slowest in five months, squeezing profitability.

Key Statistics and Insights

• The au Jibun Bank Flash Japan composite PMI rose to 50.8 in January, up from last month’s final reading of 49.7 and emerging above the break-even 50 line for the first time in three months.
• Factory output and new orders decreased for a seventh consecutive month, although at slower paces than last month.
• The services PMI rose to a seasonally adjusted 52.4 in January from the previous month’s 51.1 final reading, hitting a three-month high.

Expert Analysis

Laura Denman, economist at S&P Global Market Intelligence, which compiles the survey, noted that the divergence between the manufacturing and services sectors has remained similar to trends recorded over much of the past six months. "Similar to trends recorded over much of the past six months, a divergence between the manufacturing and services sectors has remained," she said.

This divergence is likely due to the global economic outlook, which continues to worsen. The ongoing China-US trade tensions, Brexit uncertainty, and rising living costs are all contributing factors to the weakness in external demand. In this context, the continued growth of the services sector in Japan provides some hope for policymakers looking to offset the impact of inflation on consumers.

Conclusion

The contraction of factory activity in January is a concern for policymakers, as it reinforces fears of a slowdown in the Japanese economy. However, the continued growth of the services sector provides some relief and suggests that the economy may still be able to grow despite manufacturing weakness. The ongoing divergence between manufacturing and services sectors highlights the need for policymakers to address the global economic outlook, which continues to deteriorate.

The coming months will be crucial in determining whether Japan’s economy can overcome its current challenges and sustain its post-pandemic recovery. If key wage talks do help offset the impact of inflation on consumers, it could provide a boost to household spending and help stimulate factory activity. However, the outlook remains uncertain, and policymakers must carefully monitor the situation before making any decisions.

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