The Japanese manufacturing industry is undergoing a winter like test. The latest data on Monday (March 3) showed that factory activity in Japan shrank for the eighth consecutive month in February, with weak domestic and international demand and insufficient business confidence becoming the main drag factors. Although the rate of contraction has slowed down, the outlook is still not optimistic, and the shadow of trade protectionism adds more uncertainty.

Factory activities continue to shrink

According to the Purchasing Managers' Index (PMI) for manufacturing at Au Jibun Bank in Japan, the final value for February was 49.0, slightly higher than January's 48.7 and initial 48.9, but still below the boom bust line of 50 for the eighth consecutive month, indicating a continued contraction in manufacturing activity. Although the rate of contraction is the slowest in three months, the overall situation is not optimistic.

Weak demand drags down production

The survey shows that weak domestic and international demand is the main drag factor. Enterprises generally report that the sluggish demand in the United States, Europe, and China has led to new orders falling below the critical value of 50.0 for several consecutive months. The key production sub indices have also contracted for the sixth consecutive month, although the pace has slowed down.

Significant decline in business confidence

Although Japanese manufacturers remain optimistic about their business prospects, the level of optimism has significantly decreased compared to last month. The outlook for production in the coming year has dropped to the most pessimistic level since June 2020. Trade protectionism policies and slow economic recovery are seen as the main downside risks.

Employment and cost pressures coexist

The employment level stagnated in February, with full-time vacancies offset by voluntary resignations and retirement. At the same time, the rising costs of raw materials, labor, and utilities, coupled with exchange rate fluctuations, have pushed up input prices. Manufacturers have to accelerate the increase in sales prices to cope with operational cost pressures.

summarize

The winter of Japan's manufacturing industry is still ongoing, with weak domestic and foreign demand and the shadow of trade protectionism policies dampening business confidence. Although the rate of production contraction has slowed down, the sluggish new orders, rising costs, and stagnant job market have further exacerbated the uncertainty in the industry. In the future, the process of global economic recovery and changes in trade policies will be the key to whether Japan's manufacturing industry can overcome its difficulties.

In the short term, the risk of trade protectionism may drive up the demand for safe haven yen, but in the long run, the contraction of Japan's manufacturing industry, weak demand, and weak economic fundamentals will put pressure on the yen.