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Japanese manufacturing activity shrinks in May amid weak demand

Japanese manufacturing activity dropped in May as output declined amid weak demand, while factories' outlook turned pessimistic for the first time in more than six years, data from Nikkei and IHS Markit showed.

The headline Nikkei purchasing managers' index for the Japanese manufacturing sector came in at 49.8 in May, up from the flash estimate of 49.6 but below the 50.2 reading in the previous month. A reading above 50 reflects expansion while a reading below 50 indicates contraction.

Output and new orders dropped for the fifth month in a row, as both domestic and external demand declined. Hiring grew at its weakest rate in two-and-a-half years as firms cut back on production.

"Weak demand from Japan's key trade partner, China, as well as signs of an increasingly sluggish domestic economy, have impacted sales volumes," said Joe Hayes, economist at IHS Markit.

Meanwhile, business sentiment turned pessimistic for the first time since November 2012 amid concerns about the fallout from escalating trade tensions between the U.S. and China, as well as plans to raise the sales tax in Japan later in 2019.