Sticky price pressures and the strongest hiring since February keep the inflation side of the Bank of Japan’s case intact, even as activity growth slows. The survey’s explicit link between cost pressures and the weak yen may add to policymakers’ sensitivity to further currency weakness. For JGBs, already under pressure from the global rise in yields, the data offers little relief, since selling prices sit close to record levels. Equity investors may focus on the export and AI-related demand strength, which supports manufacturers and chip-linked names, over the softer domestic picture.
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Earlier:
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Japan’s economy is expanding at a slower pace, yet firms are raising prices almost as fast as ever and hiring harder, a combination that keeps inflation front of mind.
Summary:
- The flash composite output index eased to 52.5 from 53.5, a four-month low but the 18th straight month of expansion
- The manufacturing PMI slipped to 54.1 from 54.9, output growth hit a three-month low, and the services index fell to 51.6 from 52.5
- New order growth slowed on softer domestic demand, while export order growth held at August’s eight-and-a-half-year high, driven by manufacturing
- Input cost inflation eased to a four-month low but stayed historically sharp; output price inflation was just below August’s record
- Employment rose at the fastest pace since February, backlogs grew at a seven-month high pace, and confidence reached its highest since February
- Final manufacturing data are due October 1, with services and composite on October 5
Growth in Japan’s private sector slowed to a four-month low in September as softer domestic demand weighed on activity, although price pressures remained intense and companies stepped up hiring, according to flash PMI data from S&P Global.
The flash composite output index fell to 52.5 from 53.5 in August. The reading marks an 18th consecutive month of expansion, but the pace was the slowest since May. Manufacturing continued to lead, with the headline manufacturing PMI easing to 54.1 from 54.9 and factory output growth slipping to a three-month low, as the manufacturing output index fell to 54.9 from 56.1. Services activity grew only modestly, with the business activity index dropping to 51.6 from 52.5.
Demand trends pointed to a domestic soft patch rather than an external one. Growth in total new orders slowed, with manufacturers recording their weakest sales gain in four months and services new business also softening. New export orders, by contrast, rose at the same rate as in August, when growth hit an eight-and-a-half-year high. That strength came entirely from manufacturing, as service providers reported a further drop in overseas demand. S&P Global’s Annabel Fiddes said the slowdown in new work appeared largely driven by weaker demand at home.
Inflation pressures stayed elevated. Input cost inflation eased to a four-month low but remained historically sharp, with firms citing energy and raw material costs linked to the Middle East war and the weak yen, alongside higher staff and transport expenses. Output price inflation was only slightly below August’s survey record. In manufacturing, supplier delivery times lengthened substantially amid reports of shortages.
The labour market held up well. Employment rose again, extending a run of job creation to exactly three years, with payroll growth the fastest since February, while backlogs of work increased at the steepest pace in seven months, pointing to capacity pressures. Business confidence climbed to its highest since February and above the long-run average, with firms pinning hopes on AI-related demand, semiconductors, defence and autos.
The mix of slowing activity, sticky prices and firm hiring leaves a mixed signal for policymakers. Final manufacturing data are due on October 1, with services and composite figures following on October 5.
This article was written by Eamonn Sheridan at investinglive.com.