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Japan manufacturing PMI rises in August; optimism drops to 21-month low

Japanese manufacturing activity growth improved in August amid stronger inflows of new work but business sentiment slipped amid rising geopolitical uncertainties, final data from the Nikkei and IHS Markit showed.

The Nikkei/Markit manufacturing purchasing managers' index, or PMI, inched up to 52.5 in August from 52.3 in July, in line with the flash estimate. A reading of above 50 indicates expansion.

"Japan's goods-producing sector continued to record growth at the midway point in [the third quarter], extending the current stretch of expansion to two years - the longest since the global financial crisis," said Joe Hayes, economist at IHS Markit.

However, the latest PMI reading pointed to a "relatively soft improvement" compared to those seen in the first and second quarters even as new orders rose at a quicker pace for the first time since April.

"Survey data indicated the upturn in demand was domestic-led, with export sales falling over the month. Potential escalations in trade conflict also contributed to a softening of business confidence," Hayes noted. Some survey participants also cited weaker sales to Chinese customers.

Companies hired additional staff to boost capacity amid higher order book volumes but at the softest rate since November 2016. "Meanwhile, the non-replacement of retiring staff contributed to a further slowing of job creation," Hayes said. "With this in mind, production line capabilities could be restrained over the coming months if these trends continue, irrespective of demand pressures."

Manufacturers grappled with increased shipping fees as well as higher fuel and labor costs in August, with the rate of inflation remaining near the 88-month high in July. To protect profit margins, companies raised selling prices to their steepest since October 2008.

While future output expectations were positive on the back of new product launches and Olympic Games-related work, optimism dropped to a 21-month low due to geopolitical risk concerns.