August 21, 2014 / 6:32 AM / 3 years ago

Japan manufacturers' mood, output rise, outlook dims

TOKYO (Reuters) - Japan’s manufacturers reported improving confidence and growth in new orders from domestic and export customers in August, but the service sector’s mood soured for a second straight month, reflecting a patchy economic recovery from April’s sales tax rise.

The Markit/JMMA flash Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 52.4 in August, up from a final reading of 50.5 in July as activity accelerated, sending the index further above the 50 threshold that separates expansion from contraction.

It was the third straight month of PMI growth and showed the fastest expansion in manufacturing since March. [ID:nS7N0MN00N]

“Output and new orders rose sharply, with both recording the fastest increases since before the implementation of the higher sales tax. Payroll numbers returned to steady growth and the highest in the past three months,” said Amy Brownbill, economist at PMI compiler Markit. “It would seem that the Japanese economy is recovering from the rise in the sales tax and showing more resilience than 17 years ago when a similar tax hike was implemented.”

In the Reuters Tankan survey, also published on Thursday, the manufacturers’ sentiment index rose 1 point from July to plus 20, but the service-sector gauge fell 4 points from July to plus 19 in August, in a second monthly fall.

Over the next three months, however, the Reuters Tankan sees the service sector’s mood rebounding, while manufacturers’ confidence is expected to slide, possibly reflecting lingering concerns that external demand and factory output will not improve further.

Manufacturers’ waning optimism about future conditions suggests a recent upturn in exports could be short-lived, which could eventually pressure policymakers at the central bank and in the government to consider further steps to support growth.

“Our view is exports will remain subdued throughout this year,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities. “The economy is near full employment, so we don’t expect the BOJ to move. However, the pressure will build and we expect more stimulus from the government.”

The Reuters Tankan poll of 400 big firms taken Aug. 4-18, of which 281 replied, followed data last week that showed the economy had suffered its worst slump in April-June since the March 2011 disaster. Although policymakers and private-sector economists expect a rebound in the current quarter, the poll indicated that any recovery is likely to be modest.

Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic responses from optimistic ones.

Sentiment at materials businesses such as chemicals and textile/paper took a hit, with companies raising concerns about geopolitical risks and rising raw materials costs that squeeze their profits.

Non-manufacturers in areas such as real estate/construction and retail/wholesale were still feeling the impact of the sales tax hike and led the slump.

A real estate firm said housing demand slumped sharply after the sales tax hike, and many industry participants believed it would be hard to recover at least until the next tax rise planned in October 2015, that could encourage last-minute spending to avoid the higher tax rate.

The Reuters Tankan index for manufacturers is expected to worsen to plus 17 in November, and the non-manufacturers’ index is seen rising to plus 24, meaning that optimists outnumber pessimists.

The last BOJ tankan showed on July 1 that big manufacturers’ mood worsened in the three months to June but was seen improving in the current quarter.

Economists expect annualized growth of about 4 percent for the three months to September after the sales tax hike to 8 percent from 5 percent in April pushed the economy into a 6.8 percent contraction in the second quarter.

Some expect the BOJ will have to cut its growth estimate in a half-yearly assessment due on Oct. 31, potentially nudging it into enormous purchases of government bonds and other assets.

Editing by Eric Meijer

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