Japan’s October Business Activity Declines Amid Rising Selling Price Inflation

28 Oct, 2024

Japan’s private sector activity experienced a decline in October, marking its first contraction in four months. This downturn hints at a potential slowdown in GDP growth at the onset of the fourth quarter of 2024. Both the service and manufacturing sectors contributed to the reduced business activity, with declining new orders and muted economic conditions reported by respondents. Notably, forward-looking indicators suggest further weakening in the months ahead, signaling possible ongoing challenges for the Japanese economy.

Despite the reduced business activity, October saw a notable rise in price pressures, driven by increasing costs across sectors. The combination of slower growth and intensifying inflation presents a challenge for the Bank of Japan, especially in light of its current hawkish stance. The flash Purchasing Managers' Index (PMI) from au Jibun Bank indicated the sharpest contraction in nearly two years, with the Composite PMI falling from 52.0 in September to 49.4 in October, pushing below the neutral 50.0 mark. This reading suggests the Japanese economy may face near-neutral GDP performance as the quarter progresses.

The contraction in October’s private sector activity stemmed from a broad-based reduction in sectoral output, with services joining manufacturing in decline. The services sector experienced its first drop in four months, attributed largely to weakening demand, especially in export business, leading to a significant reduction in new orders. Manufacturing continued its contraction, recording its sharpest reduction rate in six months, as demand for goods and export orders fell.

Looking ahead, indicators point to continued softness in the economy. The PMI New Orders Index, which often precedes the headline output trend, showed declines in both goods and services new orders, signaling potential future challenges. Additionally, private sector optimism for output reached its lowest since August 2020, reflecting cautious sentiment among firms, who hired at the slowest pace in over a year.

Price pressures intensified as selling price inflation climbed for a second consecutive month, with rising input, labor, and energy costs driving this increase. Both sectors saw inflation rates above their series averages, suggesting Japan’s inflation could hover near 2.0% in the coming months.

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