Japan factory activity shrinks at fastest pace since 2012 on coronavirus jolt

Workers at the inauguration of a new production plant in Otawara, Tochigi, Japan, on Nov 27, 2019. PHOTO: AFP

TOKYO (REUTERS) - Japan's factory activity suffered its steepest contraction in seven years in February, as the widening fallout from the coronavirus outbreak in China reinforced the risk of a recession in the world's third-largest economy.

The manufacturing downturn offers the clearest evidence yet of the epidemic's damaging effects on global growth and businesses, and is likely to ramp up pressure on Japanese policymakers to increase stimulus.

The au Jibun Bank Flash Japan Manufacturing Purchasing Managers' Index (PMI) fell to a seasonally adjusted 47.6 this month from a final 48.8 in January, its lowest since late 2012.

The index stayed below the 50.0 threshold that separates contraction from expansion for a 10th month. If the final reading confirms the shrinking, it will mark the longest such stretch since a 16-month run to June 2009 following the 2008 global financial crisis.

The PMI survey showed that new orders declining at the fastest pace in more than seven years, while other indicators such as overall output and backlogs of work also dropped.

"Latest PMI data... significantly raise the prospect of a technical recession in the world's third largest economy," said Joe Hayes, economist at IHS Markit, which compiles the survey.

"New business at services companies fell at the strongest rate since June 2016, with survey evidence implying that the coronavirus outbreak has hit tourism particularly hard in Japan, a key source of demand for services."

Data last week showed the economy shrank at its fastest pace in nearly six years in the December quarter, stoking talk of a recession, as the virus added to the impact of a sales tax hike on consumer and business spending.

The epidemic has already extracted a heavy human and economic toll in China, with deaths exceeding over 2,100 and prompting authorities to effect strict containment measures and step up support to cushion the blow to their economies.

The au Jibun Bank Flash Japan Services PMI index shrank at its fastest pace in nearly six years, again due to the virus' debilitating impact across the sector.

The index came in at a seasonally adjusted 46.7 from the previous month's 51.0, its lowest reading since April 2014 when Japan also implemented a nationwide tax hike.

The au Jibun Bank Flash Japan Composite PMI slumped to 47.0 in February, also hitting its lowest since April 2014 and down from the previous month's final of 50.1.

"February flash PMI data stack the odds heavily against Q1 growth, despite (Prime Minister Shinzo) Abe's best efforts to stimulate the economy after the sales tax hike," IHS Markit's Hayes said.

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