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Job losses intensify, with employment decline among fastest
since 2010
Business expectations turn increasingly negative
Japanese business activity contracted further in July, according
to flash PMI data, adding to concerns about the depth of the
economic downturn and recovery speed relative to other countries as
conditions remain challenging for many manufacturing and service
sector companies due to the COVID-19 pandemic. Businesses continued
to be adversely impacted in particular by subdued global trade
flows and restrictions on travel, while the gradual reopening of
the economy provided only a modest boost to demand.
The likelihood of a robust recovery remains uncertain as
Japanese firms continued to be pessimistic about the business
outlook, with international trade remaining subdued while rising
unemployment may hit domestic household income and spending in
coming months.
Weak start to third quarter
The headline au Jibun Bank flash Composite PMI, compiled by
IHS Markit and based on 85-90% of responses received from the
monthly surveys, rose further from 40.8 to 43.9 in July, its
highest since February. However, the latest figure, which measures
activity levels at both manufacturing and service sector companies,
remained well below 50 and signalled a further marked decline in
private sector output at the start of the third quarter.
The PMI for Japan is also lagging that of other countries: the
comparable global PMI for all countries excluding Japan had already
risen to 48.5 by June with the PMI for the developed world up to
46.9.
Having sunk to an unprecedented low in April amid enforced
emergency measures to contain the spread of the coronavirus
pandemic, Japan's PMI has regained some ground but continued to
indicate a downturn at the start of the third quarter. Companies
reported that the weakening of demand persisted into July despite
the recent easing of COVID-19 restrictions and parts of the economy
reopening. The need to maintain social distancing rules and border
restrictions in the absence of an effective vaccine continued to
hinder a swift turnaround in the Japanese economy.
Companies also continued to report reduced inflows of new
business, particularly from overseas. These firms consequently hold
back on hiring and investment due to the uncertainty of the
economic outlook, with concerns about a resurgence of new
infections in Japan and globally. Falling profits and renewed
US-China trade tensions were also worries highlighted by
companies.
Broad-based decline in activity
Manufacturing production continued to lead the decline in July.
While not as severe as in recent months, the rate of contraction
was substantial overall once again. The reduction of output was
linked to weakening demand for Japanese manufactured goods both at
home and abroad, as reflected by a further severe drop in new
orders.
In services, the resumption of business operations was
insufficient to lift overall output as services activity declined
for a sixth straight month in July. This was accompanied by a
further fall in new sales, led by export orders dropping
substantially again.
Job losses intensify
With the downturn extending into the third quarter, Japan's
labour market continued to deteriorate. Survey data showed
employment continuing to fall during July, with the rate of job
shedding intensifying from June, led by a sharper drop in
manufacturing jobs. Anecdotal evidence showed that the drop in
employment was primarily driven by firms seeking to reduce costs
not choosing to renew contracts.
Outlook remains dim
The recent improvements in the PMI data add to signs that the
worst of the initial impact of the COVID-19 pandemic was seen in
April, but the strength of the recovery remains disappointingly
weak compared to other economies. The survey data also suggest that
much of the recent gains reflect pent-up demand as businesses
returned to work rather than a robust improvement in underlying
demand. This paucity of demand is signalled by an ongoing fall in
backlogs of work and a further steep drop in new orders, especially
exports. Business expectations for the year ahead consequently
remain negative, deteriorating in July after having climbed to a
four-month high in June.
IHS Markit therefore projects the Japanese economy to contract
by 4.9% this year before expanding by a modest 1.8% in 2021, which
is more cautious than the median forecast of 3.3% anticipated by
the Bank of Japan.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
