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Japan starts fourth quarter on soft footing, but sentiment brightens
23 October 2020Bernard Aw
Flash Japan PMI highest in eight months at 46.7, but still
signals a further drop in output during October
Recovery remains gradual amid weak demand
Labour market stabilises…
… and confidence strongest in over two years
Flash PMI survey data showed the Japanese private sector started
the fourth quarter on a weak footing, with business activity
shrinking further in October. Demand conditions continued to
deteriorate. New business inflows decreased, weighed down by a
further weakening of external sales.
However, the survey also revealed some bright spots amid a
sluggish recovery. The labour market stabilised in October and
business sentiment strengthened to the most optimistic for over two
years, with service providers in particular increasingly upbeat
about prospects.
Subdued recovery
The au Jibun Bank flash Composite PMI, compiled by
IHS Markit and based on 85-90% of responses received from the
monthly surveys, came in at 46.7 in October, broadly unchanged on
46.6 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 marginally and the slowest since
February, prior to the escalation of the global pandemic
outbreak.
The latest survey data suggest that the pace of recovery is not
only slow but failing to gain momentum. The average PMI rose 14.1
points from 31.5 in the second quarter to 45.6 in the third
quarter, but stubbornly weak demand may limit the extent to which
activity rebounds in the fourth quarter. Intakes of new business
fell further in October, reflecting subdued domestic and foreign
demand due to cautious consumer behaviour, weakened firms' balance
sheets and a global resurgence of infection cases. Operating
capacity also remained in surplus, as reflected by a further rise
in backlogs of work, although the increase was the slowest for
eight months.
Job market stabilises
The survey revealed some positive signs, however. First,
employment was broadly stable in October, with workforce numbers in
both manufacturing and services largely unchanged from September.
Second, business sentiment improved to the strongest for over two
years, rising especially among services firms. In fact, the level
of optimism in the service sector rose to the highest since
February 2019.
Price pressures remain weak
Subdued inflationary pressures persisted at the start of the
fourth quarter. Having been relatively unchanged in the past two
months, input costs rose marginally during October, but the rate of
increase, particularly in import-related expenses, was restrained
by a stronger yen.
While manufacturers reported a rise in input prices, services
firms saw a further decline due to reduced expenses linked to
social distancing restrictions. With greater competition amid a
weak business environment, firms reduced their selling prices to
boost sales.
Outlook
The recovery of business activity in Japan continues to be
slow-going and could remain so in the coming months amid an absence
of a robust revival in demand. A number of headwinds also threatens
to undermine the economic progress made so far, including a global
resurgence of COVID-19 cases (which would weigh on Japan's
external-facing sectors), weak household income and declines in
corporate profits.
With the recovery gradual, and facing substantial downside
risks, there would be increasing expectations of the government to
provide additional fiscal support, with the aim to provide aid to
firms and workers, as well as stimulating demand. Anecdotal
evidence from PMI survey data indicated that the government's 'Go
to Travel Campaign' had encouraged domestic travel and provided a
much-needed boost to the tourism sector which has been greatly
affected by international travel restrictions and border
controls.
The final Japan PMI data will be published on 2nd November
(manufacturing) and 5th November (services and composite).
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.
