Business activity in Japan shrank in November on slowing production

By Ambar Warrick– Japanese business activity shrank in November, data showed on Thursday as high inflation, a weakening yen and slacking external demand weighed heavily on local manufacturers while the service sector neared contraction territory.

au Jibun Bank’s Flash Composite Output Purchasing Managers Index (PMI) fell to 48.9 in November from 51.8 in the previous month, contracting for the first time in three months.

The weak read was largely driven by an unexpected fall in Japan’s manufacturing purchasing managers’ index to 49.4 — its first decline since January 2021. Analysts were expecting a reading of 50.9, with a reading above 50 indicating expansion.

Japan’s services PMI fell to 50.0 in November from 53.2 in the previous month, suggesting that service sector activity was flat in November.

The reading comes as Japanese companies grapple with rising commodity and manufacturing costs, driven largely by rising inflation in the country. Core CPI inflation rose to a 40-year high in October, data showed last month, as a weakening yen pushed up commodity import costs.

“The focus of the recent downturn has been a poor performance by Japanese manufacturers. Cooling demand conditions and acute inflationary pressures have reportedly continued to hamper production and new orders,” said Laura Denman, economist at S&P Global Market Intelligence, which compiles the PMI data.

“Manufacturing companies also appear increasingly concerned about their future, as evidenced by a decline in business sentiment that has pushed the index to its lowest level since May.”

The services sector stagnated for a third straight month, despite rising new business inflows, as some parts of the economy benefited from a resurgence in tourism and a lifting of COVID-related restrictions.

Nonetheless, input prices appeared to ease slightly from historic highs, while the outlook for future production remained positive.

The yen barely reacted to the data, rising 0.3% to around 139 as it benefited from a weaker dollar.

Japan’s economy contracted unexpectedly in the third quarter as local businesses and consumers struggled to cope with rising price pressures. Much of this pressure also comes from the Bank of Japan’s reluctance to tighten monetary policy after maintaining ultra-low interest rates for nearly a decade.

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