Japan factory activity shrinks for 8th month in December

Tokyo

JAPAN'S factory activity extended its fall in December as a prolonged decline in output and new orders threatened to tip the economy into contraction in the current quarter.

The Jibun Bank Flash Japan Manufacturing Purchasing Managers' Index (PMI) edged down to a seasonally adjusted 48.8 from a final 48.9 in the previous month.

The index stayed below the 50 threshold that separates contraction from expansion for an eighth month.

If the final reading due early next year also shows a contraction, it will mark the longest such run since a nine-month stretch to February 2013.

The key output and new orders indicators have remained in contraction for the entire year, indicating prolonged strains in factory activity.

New export orders shrank for a 13th month, though they showed signs of bottoming out as the pace of decline was the slowest in a year.

The decline in manufacturing poses a growing headache for policymakers counting on robust demand at home to prop up slowing growth, with consumer spending taking a hard hit from October's sales tax hike.

Separate data released on Monday showed activity in Japan's services sector improved for a second month in December, but the rise was too small to make up for the slump in manufacturing activity.

"The most disconcerting takeaway from fourth quarter survey data has been the marked loss of momentum in the service sector," said Joe Hayes, an economist at IHS Markit, which compiled the survey.

"It is now clear that the service sector is unable to offset the industrial weakness, which does not bode well for growth prospects in 2020."

Policymakers have already taken steps to address the rising outlook risks, with the Cabinet approving a US$122 billion fiscal package to support stalling growth in the world's third-largest economy.

The Jibun Bank Flash Japan Services PMI index came in at a seasonally adjusted 50.6 from the previous month's 50.3.

However, the reading remained below much higher levels seen during the first nine months of the year, in August hitting a nearly two-year high of 53.3.

The Jibun Bank Flash Japan Composite PMI was steady from the previous month's final of 49.8.

Separately, a central bank survey showed that Japanese companies' inflation expectations slid in the three months to December, a sign that years of heavy money printing has done little to turn around the public's sticky deflationary mindset.

The data reinforces market expectations that subdued inflation will force the Bank of Japan (BOJ) to maintain its massive stimulus programme for a prolonged period, or even ramp it up, to hit its elusive 2 per cent price goal.

Japanese companies expect consumer prices to rise an average 0.8 per cent a year from now, lower than their projection three months ago, the BOJ's quarterly survey showed on Monday.

Three months ago, companies expected prices to rise 0.9 per cent over the next year.

Firms polled by the BOJ, as part of its detailed tankan survey for December, also said they expect consumer prices to rise an annual one per cent three years from now and an annual 1.1 per cent five years from now.

The forecasts were both unchanged from three months ago.

Japan's annual core consumer inflation of 0.4 per cent in October was well below the BOJ's 2 per cent target, casting doubt on its view that a steady economic recovery will boost consumption and prod firms to pass on rising costs to households.

The economy is showing signs of weakness, with household spending falling in October for the first time in almost a year due partly to a sales tax hike that rolled out during the month.

But the BOJ is expected to hold off on expanding stimulus at its Dec 18-19 rate review, preferring to save its dwindling ammunition for due to the rising cost of prolonged easing such as the hit to bank profits from ultra-low rates.

The BOJ started the survey on corporate price expectations from the tankan in March 2014 to gather more information on inflation expectations, key to its current stimulus programme. REUTERS