July 30, 2007 / 11:33 PM / 13 years ago

Japan July manufacturer PMI contracts, output weak

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TOKYO, July 31 (Reuters) - Japanese manufacturers’ activity in July contracted for the first time since May 2003 due to weak output and demand, a survey showed on Tuesday.

The NTC Research/Nomura/JMMA Purchasing Managers Index, which gives an early snapshot of the health of manufacturing, declined to a seasonally adjusted 49.0 in July from 50.4 in June.

A reading above 50 suggests expansion, while a figure below 50 points to a contraction.

The PMI, compiled from a string of diffusion indexes and based on responses from more than 350 manufacturers, had already slipped to the weakest level in four years in June.

Paul Smith, an economist at NTC Research, said that while exporters are benefiting from the weak yen and robust overseas sales, domestically focused companies are suffering from the dual problem of rising procurement costs and brittle local demand.

The PMI’s new orders index, a barometer of future demand that combines goods orders from both home and abroad, stood at 46.8, signalling the greatest fall in incoming new work since February 2002.

Although the new export orders index declined to 52.0 from 53.3 in June, it logged its 31st straight month of increase thanks to solid demand from Europe as well as China and other emerging markets, the report said.

The report said some companies pointed to the weak yen as helping to boost sales abroad.

The output index, which approximates industrial production, fell to 48.1 from 50.8 in June, hitting the lowest level since February 2002.

The greatest declines in output were seen in such sectors as basic metals, food and drink and the electrical and electronics sectors.

HIGHER PRICE TAGS The output price index, meanwhile, rose to 52.6 from 50.5 in June, signalling that companies are passing on higher procurement costs to the prices of their products.

The index was the strongest ever recorded since the survey begun almost six years ago, the report said. The sharpest rates of inflation were seen in the food and drink and chemicals sectors.

“With the marked drop-off in new orders signalled, it would seem that local markets are not yet capable of absorbing these higher selling prices,” Smith of NTC said.

The input prices index, which gauges manufacturers’ procurement costs, remained well above the 50 no-change mark at 68.9, although down slightly from 69.8 in June, when the index hit a nine-month high.

Surveyed companies cited the rising cost of oil and increasing metals prices as reasons behind higher procurement costs, the report said.

Job conditions continued to improve in July, but the rate of growth in employment eased to its lowest level since December 2005 with the index falling to 51.4 from 53.2 in June.

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