Japan's factory activity in December shrinks at fastest pace in 26 months

Japan's factory activity in December shrinks at fastest pace in 26 months


The third biggest economy's service-sector activity grew on a tourism reopening.

TOKYO (Reuters) - Japan s manufacturing activity shrank at the fastest pace in more than two years in December on soft demand and persistent cost pressures, a corporate survey showed on Friday.

While service-sector output rebounded on a tourism reopening, weak factory activity has blurred Japan s recovery prospects as companies enter labour talks, in which wage hikes are deemed essential for post-pandemic economic growth.

The au Jibun Bank Flash Japan Manufacturing Purchasing Managers  Index (PMI) was down to a seasonally adjusted 48.8 in December from a final reading of 49.0 in the previous month.

The index was below the 50-mark that separates contraction from expansion for a second month and marked the sharpest decline since October 2020 s 48.7.

"Manufacturing firms continued to struggle in the face of subdued demand conditions and severe inflationary pressures," said economist Laura Denman at S&P Global Market Intelligence, which compiles the survey.

Output and new orders extended their contraction for a sixth month in December, although at slower paces than last month. Input price inflation rate slowed for a third month to the lowest pace since September 2021.

Meanwhile, service-sector activity grew on a tourism reopening, with the sub-index gauging its demand from overseas rising to the highest since September 2019.

The au Jibun Bank flash services PMI rose to a seasonally adjusted 51.7 in December, from the previous month s 50.3 final, the survey showed.

With subdued manufacturers and robust services, the au Jibun Bank Flash Japan composite PMI stood on the break-even line of 50.0, up from a final 48.9 last month.

"The divergence between the manufacturing and services sectors has grown further," said Denman, citing the government s discount program for domestic tourists as an additional positive factor for the service-sector firms.

The growing disparity was also evident in the Bank of Japan s latest business survey released on Wednesday, which found manufacturers  mood soured for a fourth consecutive quarter while service firms  sentiment hit its highest since late 2019.