Tokyo Factory Activity Shrinks in July

Japan’s factory activity shrank modestly in July due to tepid domestic and overseas demand and increased inflationary pressures, as shown by a private-sector survey released on Thursday.

This survey follows the Bank of Japan’s recent decision to raise interest rates and outline plans to reduce its significant bond buying, marking further steps toward phasing out massive stimulus.

The final au Jibun Bank Japan manufacturing purchasing managers’ index (PMI) fell to 49.1 in July from 50.0 in June, marking the first drop below the 50.0 threshold that separates growth from contraction in three months, and was little changed from the 49.2 reported in the flash PMI.

Usamah Bhatti from S&P Global Market Intelligence commented on the downturn, stating, “The performance of the Japanese manufacturing sector was downbeat at the start of the third quarter of 2024.” He noted that new orders declined at their fastest pace since March due to subdued demand domestically and internationally, particularly affecting the automotive sector.

Despite prevailing inflationary pressures, Bhatti mentioned that, “firms opted to raise their selling prices at a softer rate to maintain market competitiveness.” The input prices index accelerated at its fastest pace since April 2023, with firms citing increased raw material, labor, oil, and logistics costs, along with the yen’s weakness as contributing factors to the rise in input prices.

Last month, the Japanese currency fell to a 38-year low against the U.S. dollar.

While the output prices increased in July, it was at the softest pace in four months as firms sought to remain competitive. Nevertheless, business sentiment stayed solid in July, with firms holding onto hopes for a recovery in demand, both domestically and internationally, to help acquire new clients and promote business growth plans.