Japan's manufacturing sector still struggling after sales tax rise

Japanese manufacturers are clearly still struggling after the country raised its sales tax on 1^st April, though perhaps not as much as official data are currently suggesting.

Official data on manufacturing output showed production falling 1.5% in August, more than reversing a 0.5% rise in July. Over the last three months, output is down some 4.1% on the previous three months, which is the steepest rate of decline seen since June 2011, in the aftermath of the Fukushima incident. The data have fueled worries that Japan is sliding back into recession.

Some solace was gained from the Bank of Japan Tankan survey showing confidence among big manufacturers edging higher in September. But the Tankan's index of all manufacturers, including SMEs, in fact fell from +6% in the second quarter to +4%, its lowest since the third quarter of last year.

Higher frequency, and more up-to-date, data on the health of the manufacturing sector are provided by the Markit/JMMA PMI. This survey showed the production trend improving in September, with output growing at the fastest rate since March.

Changes in the PMI tend to lead both the official manufacturing data and the Tankan survey, and the upturn in the PMI's output index suggests that we should see the official production trend pick up in September.

However, all is clearly not well in Japan's goods-producing sector, with firms under pressure to cut costs and downsize via staff cuts. The headline PMI, which includes measures such as order books and employment, fell from 52.2 in August to 51.7 in September. Inflows of new orders weakened, a net drop in headcounts was reported for the first time since July of last year and exports grew at a reduced pace. All of which suggest output growth could slow again in coming months.

September's services PMI will add further insight into the extent to which the economy has suffered due to the sales tax rise. The August survey saw services activity more or less stagnate. As with manufacturing, this stalling contrasts with buoyant growth at the start of the year and will be a worry for policymakers, who are currently pondering whether a further sales tax hike can be accommodated next year without tipping the economy back into recession.

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