Japan factory activity shrinks at fastest pace since 2016 on coronavirus hit

A worker sprays glaze onto a toilet at a Toto toilet factory in Kitakyushu, Japan, on Feb 6, 2020.
A worker sprays glaze onto a toilet at a Toto toilet factory in Kitakyushu, Japan, on Feb 6, 2020.PHOTO: REUTERS

TOKYO (REUTERS) - Japan's factory activity was hit by its sharpest contraction in nearly four years in February, raising a red flag over manufacturing in the world's third-largest economy as the impact from the coronavirus outbreak spreads.

The manufacturing slowdown 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 boost growth.

The au Jibun Bank Japan Manufacturing Purchasing Managers' Index (PMI) slipped to a seasonally-adjusted 47.8 from a final 48.8 in the previous month. The February reading was its lowest since May 2016.

The index stayed below the 50.0 threshold that separates contraction from expansion for a 10th month, marking the longest stretch since a 16-month run to June 2009 during the global financial crisis.

"Near-term prospects for Japan's industrial sector appear very bleak," said Joe Hayes, economist at IHS Markit, which compiles the survey.

"Weakness was driven by the demand-side in a broad-based fashion. Consumer, intermediate and capital goods producers recorded faster declines in demand and overall order books fell at the sharpest rate in over seven years."

The pressure on the world's third-largest economy has built rapidly during the past weeks as the virus outbreak is dealing a sharp blow to China's economy, Asia's biggest.

China is one of Japan's top export markets, and many Japanese firms sell their products to Chinese customers to supply its factories with parts and equipment for manufacturing.

The PMI survey showed new orders falling at the fastest pace in more than seven years due to weak economic conditions and lower sales to customers in China.

 

Other indicators such as overall output and backlogs of work also dropped, while new export orders contracted for the 15th straight month. Hayes also said that some Japanese companies reported they were unable to source key raw materials from suppliers in China.

"Existing buffer stocks helped to offset some of the shortfall, but if supply chain disruptions carry on for an extended period then the risk to industrial output will be far greater," he added.