Activity in Japan’s factory sector has deteriorated to the worst level since February, adding to fears of a technical recession as the last quarter of the year heads toward an end.
The au Jibun Bank’s purchasing managers index of activity in Japan’s manufacturing sector fell to 48.1 in November, remaining below the 50 mark that separates a contraction from an expansion. The reading in the service sector marginally improved, while the composite gauge fell 0.5 to 50.0, its lowest level this year.
The data suggests that global demand remains sluggish, while Japan’s economy shrank more than expected in the third quarter as domestic activity also remained lackluster. Amid a weak yen and continued inflation hitting households, some economists have pointed to the risk of the country seeing two consecutive quarters of contraction, entering a technical recession.
Friday’s data isn’t good news for Japan’s fragile economy, which is already set to be surpassed by Germany this year as the world’s third largest, according to projections from the International Monetary Fund. While much of that is the result of a weaker yen shrinking the size of the economy in dollar terms, underlying demand also remains sluggish.
PMI data showed factory output and new orders fell again, with the pace of declines in new orders quickening. The manufacturing sector also continued to shed jobs.
Amid the concerns, Prime Minister Fumio Kishida has already made an attempt to support households hit by inflation, unveiling a more than ¥17 trillion ($114 billion) stimulus package earlier this month. But that appears to have had little impact on popular sentiment, with recent polls showing the lowest support rating for Kishida since he took office two years ago.
On the global scale, worries about recession loom for other major economies due to tightening cycles that have kept interest rates elevated. Manufacturing is also seeing a broad downturn across Asia, even among the best performers, as slow international demand weighs on the region.
The weak results support the Bank of Japan’s reasoning for keeping its rate levels unchanged and delaying policy normalization. But the country’s key inflation measure quickened slightly on Friday, which may stir speculation over policy change. Officials will closely watch key economic data in the coming months for any signs of revival in Japan’s economy, particularly for gains in wages.
While the weak yen has hit Japan’s importers by making shipments more expensive, it has also helped resuscitate tourism demand, one bright spot for the economy. The number of overseas visitors officially returned to pre-pandemic levels last month, and spending per tourist has also beaten pre-Covid levels. Service sector businesses expressed the most optimistic outlook for the next year since August, the PMI survey found.