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Flash Japan PMI signals further economic decline, but confidence strengthens
23 September 2020Bernard Aw
At 45.5, Flash Japan PMI signals a further steep drop in output
during September
Downturn remains broad-based amid weak demand
Pace of job shedding moderates
Business confidence highest in eight months
Business activity in Japan's private sector continued to decline
in September, according to the flash PMI data, setting the scene
for further economic weakness in the third quarter. Other survey
indicators point to a challenging recovery in the coming months,
with demand conditions still subdued.
However, some rays of light are appearing. Despite showing the
downturn persisting into the end of the third quarter, the survey
also showed some encouraging signs: labour markets moving towards
stabilisation and business confidence strengthening further,
noticeably among goods producers, amid rising expectations that the
pandemic will be brought under control in the year ahead.
Broad-based downturn persists
The headline au Jibun Bank flash Composite PMI, compiled by
IHS Markit and based on 85-90% of responses received from the
monthly surveys, edged up from 45.2 in August to 45.5 in September.
The index signalled a further marked decline in private sector
output across both manufacturing and services but with the rate of
decline easing slightly.
While the latest survey data pointed to a slow pace of recovery
from the COVID-19 downturn, particularly in light of stronger
recoveries observed in other advanced economies, the picture for
Japan's economy was much improved in the third quarter when
compared to the height of the pandemic during the second quarter.
At 45.2, the average PMI for the three months ending September was
the highest so far this year, and noticeably higher than the 31.5
recorded in the second quarter.
The survey also revealed some positive signs. Firstly, overall
employment moved closer to stabilisation in September, with only a
marginal drop in workforce numbers that was the weakest fall seen
in the current sequence of job shedding. Secondly, business
sentiment improved to the strongest since the start of the year,
rising especially among manufacturing firms. In fact, the level of
optimism in the manufacturing sector rose to the highest for just
over two years.
That said, demand conditions remained stubbornly weak,
reflecting subdued domestic and foreign markets due to uncertainty
regarding the pandemic trajectory and ongoing border restrictions.
Inflows of new business consequently continued to fall in
September, led by a further export decline. This contributed to
further evidence of spare operating capacity: backlogs of work were
depleted for a thirteenth consecutive month.
Subdued price pressure
Japanese firms continued to face subdued price pressure amid the
persistent economic downturn. Having been unchanged in August,
input costs rose only marginally in September, driven up by higher
manufacturing expenses linked to greater base metal prices and
increased transport fees. In contrast, service providers reported a
further fall in business expenses due in part to lower labour costs
and reduced operating hours connected to social distancing
measures. Facing weak business conditions, companies reduced their
selling prices in hopes of stimulating sales.
Outlook
While the worst of the pandemic impact on Japanese economic
activity was evident in the second quarter, a robust recovery in
the economy is by no means assured.
The resumption of business activity in Japan remains gradual, as
uncertainty over the course of the pandemic trajectory continues to
weigh on investment and poses as a key risk for Japan's economic
recovery. Meanwhile, weakened labour market prospects and wage
declines (due partially to reduced working hours), alongside social
distancing practices, will constrain consumer spending in the
months ahead.
A more solid improvement in demand is required to lift the
economy into expansion territory. A consistently subdued recovery
may therefore also require the government to consider additional
policy support, depending on the pandemic situation and any
occurrence of natural disasters.
Economic policy under the new prime minister Yoshihide Suga is
unlikely to change significantly from his predecessor, Shinzo Abe,
with the focus of fiscal measures expected to remain on alleviating
the negative impact of COVID-19. As long as the economy continues
to be affected by the pandemic, there will be limited scope for
wider structural reforms, other than those already presented in
FY2020/21.
The Bank of Japan is expected to maintain its
ultra-accommodative monetary policy and special lending programmes,
though the central bank may enhance the lending scheme if the
economic situation worsens.
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.
