By Ambar Warrick
Investing.com -- Japanese manufacturing activity contracted more than expected in December, preliminary data showed on Friday, as weakening demand further dented productivity, while activity in the services sector improved on a recovery in tourism.
The Flash au Jibun Bank Japan Manufacturing purchasing managers index (PMI) fell to 48.8 in early December from 49 in the prior month, missing expectations for a reading of 49. A reading below 50 indicates contraction, with the index marking its second month in red.
Manufacturing activity was also at its weakest level since October 2020, slipping further as reports of weakening demand saw output slow. While the sector remained under pressure from higher costs, firms signaled some easing in inflationary pressures, analysts at S&P Global, which compiles the au Jibun data, said in a note.
“Manufacturing firms continued to struggle in the face of subdued demand conditions and severe inflationary pressures,” Laura Denman, Economist at S&P Global Market Intelligence wrote in a note.
They also noted that the pace of contraction in the sector had slowed, and that input price inflation was now at its lowest level since September 2021.
Conversely, the Flash au Jibun Bank Japan Services PMI rose to 51.7 in early December from 50.3 in November, boosted largely by increased tourism volumes.
Japan introduced an up to 40% discount on local travel to support tourism, after relaxing all anti-COVID restrictions in the country earlier this year. Service providers also coped with higher costs by passing them on to customers.
Strength in the service sector helped overall business activity in Japan edge into expansionary territory, albeit barely. The Flash Composite Output Index rose to 50 in December from 48.9 in the prior month.
Still, Japan’s economy remains under pressure from a mix of rising inflation and weakening overseas demand for its goods. This saw the country log a bigger-than-expected trade deficit in November, while sentiment among its biggest manufacturers worsened.
The Japanese economy also unexpectedly contracted in the third quarter, and is expected to stick to a similar pattern in the coming months.
The yen rose 0.2% on Friday, but was set for steep weekly losses.