Talk about conflicting messages from the data – Japan has a problem that is taxing the government and the central bank.
Last week the economy grew faster than expected in the March quarter, yesterday we learned that sharp falls in exports and imports produced a six year high for the country’s trade surplus, while the early report on the health of the country’s manufacturing sector showed it wasn’t very buoyant at all.
In fact manufacturing (still the most important sector in Japan and the continuing focus of government and policymaker interest) slowed even further in May from April’s surprise slide.
The Nikkei-Markit’s preliminary manufacturing purchasing managers index hit a fresh low with a reading of 47.6, down from the previous record low of 48.2 in April.
(The 50 level separates contraction from expansion, and the sector has now been contracting for three consecutive months in Japan.)
Economists at Markit, which helps compile the survey, blamed the poor performance on sluggish global demand and the lingering effects of two severe earthquakes which hit Kyushu in April, disrupting activity in one of Japan’s main manufacturing regions.
Markit economist Amy Brownbill said in a commentary that Japanese manufacturing conditions deteriorated at a faster rate mid-way through the second quarter of 2016, suggesting the aftermath of the earthquakes were still weighing heavily on goods producers.
She wrote that one of the primary reasons behind the fall in total new orders was a marked contraction in foreign demand, which saw the sharpest fall in over three years. Goods producers were also less optimistic towards hiring policies with the rate of job creation easing from April’s three-month record.
And the stronger yen isn’t helping (as we saw from the April trade data). Japan’s trade surplus rose to its highest level in just over six years in April – a month when the yen traded at 18 month highs.
The government said the trade surplus rose to ¥823.5 billion ($US7.5 billion) in April, from a revised ¥754.2 billion (previously ¥755 billion) in March.
It was the largest surplus since March 2010. Worryingly for the health of the economy, imports slumped 23.2% year-on-year to an unadjusted ¥5.065 trillion, easily exceeding the 14.9% slide in March.
It was the biggest percentage drop in imports since October 2009, when imports collapsed 35.5%. It was the 16th month in a row Japan’s import bill has fallen and the big drivers have been falling commodity prices. In April, the government said the value of crude oil imports plunged 51.8% and the value of imports of liquefied natural gas slumped 44%.
Exports are also likely to have been affected by the earthquakes that hit the southern island of Kyushu last month, with economists expecting that supply disruptions could weigh on the June quarter GDP.
A sign of that was the 4.4% drop in car exports to the US thanks to the problems the quakes caused with supply lines to car plants.
It marked the seventh straight month of falling exports and was the biggest drop since the 12.9% drop in January, when Japanese shipments to Asia slowed sharply ahead of the Lunar New Year holidays.
Exports to China – Japan’s largest trading partner – fell 7.6% in April, while shipments to the US-bound shipments fell 11.8% year-on-year. But exports to Asia, which accounts for more than half of Japan’s shipments, fell 11.1% in the year to April, while EU-bound shipments rose 9.9%.
Steel exports slid 32% from April of last year, while exports of organic compounds (chemicals) fell 25.1%.
Data last week showed the world’s third-largest economy unexpectedly expanded at the fastest pace in a year in the first quarter. The economy grew by 0.4% quarter on quarter, or 1.4% on an annual basis.
That reversed the 1.7% contraction in the December quarter of 2015. An 0.6% rise in exports in the three months to March helped boost growth as did stronger domestic consumption.
Analysts say that rebound is not strong enough to dispel concerns over a contraction this quarter, and the weak trade data for yesterday adds to that impression.
