Japan Covid-19 curbs push private-sector factory activity into contraction, while consumer prices extend falls

A PMI survey showed overall output posted the weakest monthly expansion since February.
A PMI survey showed overall output posted the weakest monthly expansion since February.PHOTO: REUTERS

TOKYO (REUTERS) - Japan's factory activity expanded at a slower pace in May as growth in output and new orders eased, in a sign that emergency curbs to stem a rise in coronavirus infections were hampering the country's economic recovery.

Activity in the service sector contracted at the fastest pace in nine months, pulling the private sector as a whole into contraction after the previous month's expansion.

The au Jibun Bank Flash Japan Manufacturing Purchasing Managers' Index (PMI) weakened to a seasonally adjusted 52.5 in May from a final 53.6 in April, data out on Friday (May 21) showed.

The PMI survey showed overall output posted the weakest monthly expansion since February, in a sign that a state of emergency curbs in Tokyo and other major areas were taking a toll on manufacturers.

"Disruption to short-term activity is likely to remain until the latest wave of Covid-19 infections passes and restrictions enacted under state of emergency laws are lifted," said Mr Usamah Bhatti, economist at IHS Markit, which compiles the survey.

Separate government data showed Japan's core consumer prices fell for the ninth straight month in April as a record slump in cellphone fees offset rising energy prices, suggesting that weak demand and higher costs will weigh on a fragile economic recovery.

The core consumer price index (CPI), which excludes the effect of volatile fresh food costs, fell 0.1 per cent in April from a year earlier, smaller than a median market forecast for a 0.2 per cent drop and in line with March's decline.

Manufacturers saw input prices rising for a 12th month, while output prices were largely unchanged, causing the widest gap between the two in nearly a decade.

Manufacturers' expectations for the year ahead remained elevated on hopes of a pickup in economic activity following a wider vaccine roll-out, coming in at their highest since July 2017.

But the PMI survey also pointed to a marked decrease in service sector activity, which contracted at the fastest pace since August last year.

The au Jibun Bank Flash Services PMI index slumped to 45.7 on a seasonally adjusted basis from April's final of 49.5.

The au Jibun Bank Flash Japan Composite PMI, which is calculated using both manufacturing and services, fell to a four-month low of 48.1 in May, down from the previous month's final of 51.0.

As for inflation, a record 26.5 per cent in cellphone charges knocked 0.5 per cent off core CPI, the government data showed, as carriers heeded Prime Minister Yoshihide Suga's calls to ease the burden on households.

By contrast, energy prices rose 0.7 per cent in April, marking the first gain since January last year due to recent rises in crude oil costs and the base effect of last year's slump.

Any decline in manufacturers' profits would be a huge risk to firms' capital expenditure plans and leave the economy without a driver as the country wrestles with the hit to consumption, analysts say.

Japan's economy shrank in the first quarter and analysts expect any rebound in April to June to be modest as new Covid-19 infections forced the government to reintroduce state of emergency curbs, hurting already weak consumption.

Inflation has barely picked up in Japan as companies remain wary of passing on higher costs to households, even as supply bottlenecks and labour shortages stoke inflation fears in the United States and some other advanced economies.