Japan factory activity slows down in June as costs rise

But growth in manufacturing output shows optimism.

Japan saw its factory activity expand for the second consecutive month in June, although the rate of growth slowed down as orders weakened and cost pressures intensified.

According to the au Jibun Bank Flash, Japan manufacturing purchasing managers' index (PMI), the figure stood at 50.1, slightly lower than May's 50.4, but still above the 50.0 threshold that separates growth from contraction monthly.

Jingyi Pan, the economics associate director at S&P Global Market Intelligence, expressed that Japan's private sector expansion hit a roadblock mid-year.

However, there was some optimism to be found in the growth of manufacturers' output, which expanded in June for the first time since May 2023. Despite this, there was a decrease in new orders during the same period.

A cause for concern was the pressure on margins for Japanese firms, as price pressures in the manufacturing sector increased in June with input costs and output prices rising at a quicker pace than the previous month.

Nonetheless, manufacturers seemed optimistic about the coming year, even with the slowdown in new orders. On the other hand, the service sector experienced a decline in business activity for the first time in almost two years due to subdued new business. The au Jibun Bank flash services PMI dropped to 49.8 in June from 53.8 in May, marking the sector's first contraction since August 2022.

Service providers in Japan mentioned that output was limited by labour constraints, even as they continued to hire more staff. Input cost inflation in the sector also rose in June, although firms raised average charges at the slowest pace in seven months to boost sales.

The composite PMI, which combines both manufacturing and service sector activity, eased to 50.0 in June from 52.6 in May.

In response to the economic conditions, the Bank of Japan made the decision last week to begin trimming its significant bond purchases and is set to unveil a detailed plan in July.

This move signals a step towards unwinding the massive monetary stimulus that has been in place. This development could have significant implications for Japan's economy and will be closely watched by experts and analysts in the coming months.