Japan's PMIs Make Partial Recovery

Japan's composite PMI move sharply higher in July but still stopped short of the key 50 mark that represents output neutrality. While the composite index is up in July at 43.9, the index still points to private sector growth weakening. The queue percentile standing of this index on data back to January 2016 finds it only in 5.7 percentile of that queue of data. There have only been four weaker readings for the composite on this timeline and all of them have come in the preceding four months to July.

Japan's overall weakness is the product of nearly equal weakness in both its manufacturing and service sectors. However, manufacturing has been quite weak for the last year. The three-month, six-month, and 12-month averages of the manufacturing PMI show values that have slipped modestly from 47 over 12 months to 45 over six months to 41.7 over three months. Service sector gauges were even weaker to start with; they also show persistent contraction but with their profile declining from 44.9 over 12 months to 38.2 over six months and then falling to a much weaker 27.3 over three months. The service sector has been hit the hardest recently by the efforts to contain the coronavirus.

In July, however, manufacturing has a weak 3.8 percentile standing that is only slightly weaker than the service sector standing at its 5.7 percentile- as weakness goes this is very balanced. But in a list of 18 countries in June, Japan's manufacturing sector PMI value ranked 16th as Japan has not been able to recovery as quickly as other countries have and Japan's manufacturing sector has remained relatively more troubled. Only Mexico and Indonesia had weaker manufacturing PMI gauges in June compared to Japan. Japan is caught with a still weak domestic economy and weakness in its two most important trading partners who are still embroiled in trade unrest and political sparring.

However, despite its problems the Japanese government today has just raised its economic assessment for the second month in a row. The cabinet office comment on the situation is this: "The Japanese economy is still in a severe situation due to the Novel Coronavirus, but it is showing movements of picking up recently."

The government report claims Japanese exports are bottoming that is a positive factor for the Japanese response to external demand. However, the government report cautions that the coronavirus is still an active factor in Japan.

The jump in the service sector reading from June to July is a clear indicator that some things on the domestic front are doing better. Still, the diffusion indexes continue to flag contraction across manufacturing and services.

The best part of the report is that there are gains in the month for both manufacturing and services in July and that the service sector has made such a strong improvement. That is the sort of improvement we saw in other countries in previous months. The coronavirus tends to hit the service sector very hard. The sharp improvement in services could be a sign that Japan is getting reading to join other countries and to return to a path of expansion before long.