Japan’s factory activity expanded for the second consecutive month in June, though the pace of growth has slowed due to weakening orders and increasing cost pressures.
This is according to the latest au Jibun Bank flash Japan manufacturing purchasing managers’ index (PMI) released on Friday.
Manufacturing PMI and output
The manufacturing PMI stood at 50.1 in June, slightly down from 50.4 in May but still above the crucial 50.0 threshold that separates growth from contraction. This indicates a marginal expansion in manufacturing activity.
The key subindex of output, however, showed some optimism, expanding for the first time since May 2023.
Despite the positive output figures, the index of new orders dipped in June, highlighting ongoing challenges.
Rising cost pressures
Cost pressures intensified in June, with average input costs and output prices increasing at a faster pace than in the previous month. This has placed additional strain on manufacturers’ margins.
The survey noted that the rising costs are a significant concern for Japanese firms, which could impact their profitability and operational efficiency.
Service sector contraction
In contrast to the manufacturing sector, Japan’s service sector experienced a contraction in June for the first time in nearly two years.
The au Jibun Bank flash services PMI fell to 49.8 in June from 53.8 in May, dropping below the 50.0 mark for the first time since August 2022.
Service providers attributed the decline to labour constraints, even as they continued to hire more staff. Input cost inflation in the service sector also rose, but firms raised average charges at the slowest pace in seven months to support sales.
Composite PMI and economic outlook
The au Jibun Bank flash Japan composite PMI, which combines manufacturing and service sector activity, eased to 50.0 in June from 52.6 in May, indicating a stall in private sector expansion.
This slowdown reflects the mixed performance across different sectors and underscores the need for careful economic management.
Despite the challenges, manufacturers remain optimistic about the next 12 months, anticipating improvements in demand and output.
The Bank of Japan’s recent decision to start trimming its substantial bond purchases and unveil a detailed plan in July marks a step toward unwinding its extensive monetary stimulus, which could further influence economic conditions.
As the Bank of Japan moves toward adjusting its monetary policy, the outlook for Japan’s economy will depend on how effectively these challenges are managed.
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