Japan's factory activity shrinks at fastest pace in 2-1/2 years

Factory output and new orders decreased for an eighth straight month.

TOKYO, (Reuters) - Japan's manufacturing activity contracted at the fastest pace in 30 months in February, a business survey showed on Tuesday, in a worrying sign for the world's third-largest economy, which is facing weakening demand and struggling to tame cost pressures.

The au Jibun Bank flash Japan manufacturing purchasing managers' index (PMI) fell to a seasonally adjusted 47.4 in February, from a final 48.9 in the previous month. 

The index stayed below the 50-level that separates contraction from expansion for a fourth consecutive month and marked the largest decline since August 2020's 47.2.

Factory output and new orders decreased for an eighth straight month and at faster rates than January, the sub-index data showed.

Export orders logged the biggest decrease since July 2020 on relentlessly weak global demand as seen in recent indicators such as the slower-than-expected gross domestic product growth in October-December and January's record trade deficit.

By contrast, service-sector activity grew for a six month with further relaxation of domestic COVID-19 countermeasures. The government last month said it would downgrade the coronavirus's public health classification in May.

The au Jibun Bank flash services PMI rose to an eight-month-high of 53.6 seasonally adjusted in February from the previous month's 52.3 final.

"Service providers posted sharper rises in activity and new business as the latest wave of the COVID-19 pandemic faded, providing a boost to demand," said Andrew Harker, economics director at S&P Global Market Intelligence, which compiles the survey.

But service firms' input costs rose at the fastest pace in eight months, while the inflation for prices they charged to customers only advanced to a two-month-high, indicating thinner profits.

"Companies will be hoping to see price pressures ease meaningfully in the coming months to provide some support to customer demand," said Harker.

Despite the challenged cost environment, service operators' confidence improved with the business sentiment sub-index rising from a 10-month-low.

Overall, the au Jibun Bank Flash Japan composite PMI was at 50.7 in February, in line with last month's final figure, as the gloomy manufacturing index was offset by a rosy service PMI.