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Highlights
- December PMI at 49.6: Japan's manufacturing PMI rose to a three-month high, hinting at slower contraction.
- Improved employment levels: Hiring in the sector rebounded to its highest level since April.
- Inflationary pressures intensify: Rising raw material and labour costs pushed input prices higher.
Japan's manufacturing activity showed signs of easing contraction in December, according to the final au Jibun Bank Japan Manufacturing Purchasing Managers' Index (PMI). The index climbed to 49.6, the highest reading in three months, slightly above the preliminary estimate of 49.5 and an improvement from November's 49.0. While still below the 50-point threshold that separates growth from contraction, the data indicates the sector may be inching toward stability after months of declines.
Slower Declines in Production and New Orders
The moderation in contraction was attributed to slower declines in both production and new orders. However, challenges remain, as subdued domestic and overseas demand, particularly in the semiconductor industry, continues to weigh on order volumes. December marked the 19th consecutive month of declining new orders, though the rate of decline eased compared to previous months.
S&P Global Market Intelligence noted that manufacturers expressed optimism about the future, supported by plans for new product launches and mass production. This optimism suggests potential for improved performance in the coming months as firms adapt to evolving market conditions.
Employment Rebounds Amid Labour Shortages
Employment in Japan’s manufacturing sector saw a notable recovery in December, reaching its highest level since April. Companies ramped up hiring to address labour shortages and prepare for anticipated future demand. This rebound in employment reflects confidence among manufacturers in the longer-term outlook, despite current challenges.
Inflationary Pressures Escalate
Input prices surged at their fastest rate since August, driven by rising raw material and labour costs, compounded by the impact of a weaker yen. In response, manufacturers raised output prices at the sharpest pace in five months to manage inflationary pressures.
The rising cost environment underscores the dual challenge faced by manufacturers: sustaining profitability while maintaining competitive pricing in a constrained demand environment. This balancing act is expected to remain a key focus for businesses in the sector.
Outlook for Japan's Manufacturing Sector
The December PMI data suggests that while Japan's manufacturing sector is still contracting, the pace of decline is slowing, hinting at potential stabilisation. Optimism about future business prospects and efforts to address labour shortages provide positive indicators for the sector.
However, manufacturers continue to grapple with subdued demand, particularly in key industries like semiconductors. Inflationary pressures and the impact of the yen's depreciation add further complexity to the recovery trajectory.
Looking ahead, sustained improvements in domestic and international demand, alongside effective cost management strategies, will be crucial for the sector to transition from contraction to growth in the coming months.
