👀 Ones to watch: The MOST undervalued shares to buy right nowSee Undervalued Shares

PMI Surveys Show Japanese Economy Shifts To Higher Gear In Q1

Published 07/04/2017, 07:27
Updated 05/03/2021, 15:50
JP225
1.77%
JPY/USD
9,954.35%
CL
1.41%

The Japanese economy kicked up a gear during March to post the best quarterly PMI performance in three years. New business and hiring continued to grow at solid, albeit slower, rates. The economic upturn however was marred by a margin-squeeze linked to surging costs.

Faster growth in first quarter

The headline Nikkei Japan Composite Output Index, compiled by Markit, rose from 52.2 in February to 52.9 in March. This signalled the joint-strongest monthly expansion of business activity for over three years.

Furthermore, the March upturn took the average index reading for the first quarter to 52.5, indicating the best quarterly performance for three years. Overall, the PMI data are consistent with nominal GDP rising at an annual rate of 2.5% in Q1.

The manufacturing sector remained a key driver of overall economic growth in the first quarter, although a slower growth rate in output was registered in March. Meanwhile, faster service sector growth provided an additional boost to the latest upturn.

As a whole, Japan’s economy heads into the second quarter in relatively good shape. Robust economic growth rates are expected to be sustained unless growth risks intensify. Volumes of new business in both manufacturing and service sectors increased at solid, albeit slower, paces during March.

Exports expand at weaker pace

A slower rise in manufacturing new orders was linked to a waning in export growth, in turn often blamed on greater competition and the yen’s recent rally against the US dollar. Although the new export orders index indicated that export sales rose for the seventh successive month, it was the smallest rise since December.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.

Japan GDP vs PMI

Yen appreciation affects export growth

Exports

Companies raised concerns about rising overseas competition with expectations for future manufacturing output reaching the lowest in four months.

Moreover, the yen has been strengthening since January, up 5% against the US dollar so far this year. Further appreciation of the yen would trim exporters’ profits and hurt business sentiment.

Cost pressures

Inflationary pressures meanwhile remained elevated in March. The recent appreciation of the yen has not led to any meaningful easing of imported inflation. Especially strong cost increases were recorded in the manufacturing sector, where the rise in average input prices was the second-highest in just over two years, reflecting higher global commodity prices, particularly energy costs. However, recent pull-backs in world oil prices may hint at lower energy costs in coming months.

In response to higher input costs, Japanese firms raised their selling prices by the most since November 2015, although the rate of increase was marginal and below the pace of growth in costs. That said, breakdowns by sector revealed that charge inflation was subdued among manufacturers relative to service providers because of price-conscious clients. Overall, the data suggest that Japan’s private sector continued to see a squeeze on profit margins.

Policy implications

Rising cost inflation has so far been mostly absorbed by Japanese companies. This had been evident in the mild increases in charges for Japanese goods and services in the first quarter, and provided an explanation for subdued consumer inflation.

Official CPI data for February showed a 0.3% annual increase in consumer prices, which remained far below the 2% inflation target set by the Bank of Japan (BOJ). For now, there are few signs of inflation accelerating unless firms start hiking selling prices aggressively.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.

As higher global commodity prices instead of domestic demand were the primary cause for current inflationary pressures, this means the BOJ will likely maintain accommodative monetary conditions for the time being.

Consumer prices

Domestic Corporate Prices vs PMI

Disclaimer: The intellectual property rights to these data provided herein are owned by or licensed to Markit Economics Limited. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without Markit’s prior consent. Markit shall not have any liability, duty or obligation for or relating to the content or information (“data”) contained herein, any errors, inaccuracies, omissions or delays in the data, or for any actions taken in reliance thereon.

In no event shall Markit be liable for any special, incidental, or consequential damages, arising out of the use of the data. Purchasing Managers' Index™ and PMI™ are either registered trademarks of Markit Economics Limited or licensed to Markit Economics Limited. Markit is a registered trade mark of Markit Group Limited.

Which stock should you buy in your very next trade?

With valuations skyrocketing in 2024, many investors are uneasy putting more money into stocks. Unsure where to invest next? Get access to our proven portfolios and discover high-potential opportunities.

In 2024 alone, ProPicks AI identified 2 stocks that surged over 150%, 4 additional stocks that leaped over 30%, and 3 more that climbed over 25%. That's an impressive track record.

With portfolios tailored for Dow stocks, S&P stocks, Tech stocks, and Mid Cap stocks, you can explore various wealth-building strategies.

Unlock ProPicks AI

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.