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Japan stuck in downturn as manufacturing hit by trade woes
23 June 2020Bernard Aw
Flash Japan PMI signals a further sharp decline in output, led
by accelerating downturn in manufacturing
Trade weakness hit demand for Japanese goods and services
Job shedding and deflationary pressures persist
Business expectations remained negative
Flash PMI data showed business activity in Japan's private
sector contracted sharply again in June despite an easing of
emergency measures taken to limit the COVID-19 pandemic. While the
downturn slowed further from April's record decline, the Japanese
economy continued to struggle amid the collapse of global demand
for trade and tourism, adding to fears that the slump may extend
into the third quarter. Deflationary pressures meanwhile persisted
as a result of further deterioration of demand in the economy.
Signs of a recovery were elusive as business sentiment about the
year-ahead outlook remained pessimistic on balance.
Business activity falls further
The headline au Jibun Bank flash Composite PMI, compiled by
IHS Markit and covering manufacturing and services, rose 10 index
points from 27.8 to 37.9 in June, the highest level since February.
However, by remaining well below 50, the latest figure signalled a
further marked decline in private sector output at the end of the
second quarter.
The average second quarter PMI reading indicated that the
Japanese economy has fallen into a deeper recession, with
forward-looking indicators hinting of further economic decline in
coming months.
While the lifting of the state of emergency in late-May provided
some relief to the domestic sector - where the downturn in services
activity eased considerably during June but nonetheless stuck in
decline - Japan's growth continued to be adversely affected by
subdued export demand and restrictions on travel.
Trade woes hit manufacturing
The global trade downturn continued to weigh especially heavily
on Japan's manufacturing sector. Survey data showed manufacturing
production fell substantially in June, with the rate of decline the
fastest since the height of the global financial crisis in March
2009. Factories continued to cut output in response to a further
sharp fall in new orders. Foreign demand for Japanese manufactured
goods remained weak, with the latest decline in export sales among
the quickest for over 11 years amid global trade weakness.
The downturn in services activity meanwhile eased notably from
May as more businesses resumed operations thanks to the lifting of
lockdown measures. However, social distancing rules and travel
restrictions continued to hold back the recovery of the service
sector. Inflows of new business continued to fall, albeit at a much
weaker pace than seen during the lockdown months. New export
business fell for a fifth straight month, linked to the collapse in
tourism.
Job losses
As the economy remained mired in a deepening downturn, companies
sought to contain costs and survive the pandemic by cutting jobs.
Overall employment was reduced for a fourth consecutive month
during June, although the rate of decrease was only marginal. Job
losses primarily stemmed from the manufacturing sector, where the
rate of reduction in staff numbers re-accelerated in June. In
contrast, survey data showed signs of stabilisation in the service
job market, with employment levels broadly unchanged in June,
following a three-month period of decline.
Deflation
Deflationary pressures persisted in June, with both input and
output prices falling further. Firms continued to reduce their
selling prices to stimulate demand, with the rate of decrease
remaining steep overall. Input costs meanwhile dropped only
marginally, with anecdotal evidence of higher freight fees and
greater raw material prices due to shortages of inputs such as
electronic components partially offsetting the weaker fuel prices
and lower labour costs.
Recovery remains far off
Despite the easing of COVID-19 restrictions, the survey data
showed no signs of robust recovery in the months ahead. The
potential for a second wave of infections, coupled with ongoing
global trade woes and protracted international travel restrictions
could further delay the revival of economic growth.
Indeed, Japanese firms remained pessimistic about the year-ahead
business outlook, highlighting concerns over the uncertainty of the
pandemic duration and weak economic conditions. What is perhaps
more worrying is that a prolonged downturn could lead to increasing
numbers of bankruptcies and job losses, both of which will weaken
the economy's ability to recover.
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.
