I don’t know about anyone else, but this seems very disappointing to me and unlikely to make the BOJ rush into tightening.
Japan’s manufacturing sector contracted in October at its fastest pace in 19 months, dragged down by a sharp decline in new orders, according to a private-sector survey released on Friday.
The S&P Global flash Japan Manufacturing Purchasing Managers’ Index (PMI) fell to 48.3, down from 48.5 in September and its lowest reading since March 2024.
- It marks the fourth straight month the index has remained below the 50.0 threshold separating contraction from growth.
The decline was driven by sluggish domestic demand, which saw new orders shrink at a faster rate. However, there were some positive signals:
- the decrease in factory output slowed,
- and new export orders saw their shallowest drop since March.
- Manufacturers also showed renewed optimism, with the outlook for future output recovering to a three-month high.
Annabel Fiddes at S&P Global Market Intelligence noted manufacturers were “more upbeat” than service providers, “with many hoping that a recovery in global economic conditions… and stronger demand for electronics” would boost output.
This manufacturing weakness was compounded by a slowdown in the service sector, where the flash PMI dropped to 52.4
- from 53.3.
As a result, the composite PMI, which combines both sectors, fell to 50.9.
- While still in growth territory, this reading signals the slowest overall expansion of Japan’s corporate activity in five months.
The survey also highlighted building inflationary pressures, with both input and output costs rising at an accelerated rate. Fiddes said companies linked these price hikes to “higher employment, raw material and fuel costs, alongside a weak yen.”
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This report creates a difficult picture for the Bank of Japan.
- The clear contraction in manufacturing and slowdown in services make it much harder for the BOJ to justify a rate hike, despite the report simultaneously showing accelerating inflation.
- This policy paralysis—being unable to hike into a slowdown—will likely keep interest rate differentials wide, weighing on the JPY.
- While bad for the domestic economy, the resulting yen weakness may continue to provide support for Japan’s export-heavy Nikkei index.
This article was written by Eamonn Sheridan at investinglive.com.