Japan PMI slips to four-month low, price pressures remain elevated

The Bank of Japan's inflation argument remains supported by persistent price pressures and the fastest hiring since February, despite slower activity growth. The survey's explicit connection between cost pressures and the weak yen may increase policymakers' attention to further currency depreciation. For JGBs, already affected by the global yield rise, the data bring little relief as selling prices are near record highs. Equity investors might focus on the strength in export and AI-related demand, which supports manufacturers and chip-linked stocks, rather than the weaker domestic picture.

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Japan's economic expansion is decelerating, but companies are still hiking prices nearly as aggressively as ever and stepping up hiring, keeping inflation a key concern.

Summary:

• The flash composite output index dipped to 52.5 in September from 53.5 in August, marking the lowest level in four months but the 18th consecutive month of growth.
• Manufacturing PMI decreased to 54.1 from 54.9, with factory output growth reaching a three-month low. The services business activity index dropped to 51.6 from 52.5.
• Total new orders expanded more slowly due to weaker domestic demand, while export order growth remained at August's eight-and-a-half-year peak, supported by the manufacturing sector.
• Input cost inflation slowed to a four-month low but remained historically severe, as output price inflation stood just under the record set in August.
• Employment increased at the quickest rate since February, backlogs of work grew at a seven-month high, and business confidence rose to its highest since February.
• Final manufacturing PMI figures will be released on October 1, followed by services and composite data on October 5.

According to S&P Global's flash PMI, Japan's private sector expansion decelerated in September to its weakest in four months, pulled down by softer domestic demand, while price pressures stayed high and firms increased hiring.

The composite output index dropped to 52.5 in September from 53.5 in August, extending the expansion streak to 18 months but at the slowest pace since May. Manufacturing remained the main driver: the manufacturing PMI edged down to 54.1 from 54.9, with the manufacturing output index falling to 54.9 from 56.1, a three-month low. Services activity showed modest growth, with the business activity index declining to 51.6 from 52.5.

Demand patterns indicated a domestic weakness rather than an external one. Total new order growth decelerated, with manufacturers seeing the smallest sales increase in four months and services new business also cooling. In contrast, new export orders grew at the same pace as in August, when the increase was the strongest in eight and a half years. This strength was solely from manufacturing, while service providers recorded another decline in foreign demand. Annabel Fiddes of S&P Global noted that the moderation in new work seemed mainly due to softer demand from within Japan.

Inflation pressures remained high. Although input cost inflation slowed to a four-month low, it stayed historically acute, with companies pointing to energy and raw material costs stemming from the Middle East conflict and the yen's depreciation, as well as increased labour and transport costs. Output price inflation was just a notch below August's survey record. In manufacturing, supplier delivery times extended significantly due to reported shortages.

The labour market performed strongly. Employment continued to rise, marking a full three years of job creation, with payroll gains at the quickest since February. Backlogs of work grew at the fastest rate in seven months, indicating capacity strain. Business sentiment rose to its highest since February and above the long-term average, as companies pinned expectations on AI demand, semiconductors, defence, and automobiles.

The combination of decelerating activity, persistent price pressures, and strong hiring sends a mixed message to policymakers. Final manufacturing figures are scheduled for October 1, with services and composite numbers out on October 5.