Instant view: Quake drives Japan manufacturing PMI to 2-year low

TOKYO (Reuters) – Japanese manufacturing activity slumped to a two-year low in March and posted the sharpest monthly fall on record as the earthquake and tsunami on March 11 hit supply chains and production.

KEY POINTS:

— The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted to 46.4 in March from 52.9 in February, the lowest since April 2009, a survey showed on Thursday.

— The March figure represented the sharpest ever month-on-month drop in the index.

— The output component of the PMI index dropped to 37.7 in March, the lowest in two years, from 53.9 in February.

— The index for new orders dropped to 39.6 in March to hit the lowest in two years, following 54.3 in February.

— The input price index increased to 65.2 to mark the highest since September 2008, due to higher costs of raw materials such as crude oil and naphtha.

COMMENTARY:

TAKUJI OKUBO, CHIEF ECONOMIST, SOCIETE GENERAL, TOKYO

“The decline in PMI seems too slight, given that for March we expected this to fall 10 to 15 percent … so I think that the survey is including mixed data and doesn’t include the full affect of the earthquake.

“I think production could start to recover as early as April, and while it will still be below normal, in May and especially in June, (it looks) to be above the (normal) trend as manufacturers make up for the loss in production they have experienced in the previous few months.”

TAKAHIDE KIUCHI, CHIEF ECONOMIST, NOMURA SECURITIES, TOKYO

“A sharp deterioration in business sentiment was expected, led by damage to production facilities, the disruption of supply chain and demand decrease because of the quake.

“A pick-up in the economy led by an external demand we had seen till February will temporarily pause.

“It is hard to expect exports will recover till the production infrastructure recovers. On the other hand, overseas economies remain firm. We forecast that Japan’s economy will again benefit from a good appetite of demand from overseas after July-September once production recovers.

MASAMICHI ADACHI, SENIOR ECONOMIST, JPMORGAN SECURITIES, JAPAN, TOKYO

“We had expected two scenarios, the bad scenario and the worse scenario. This is closer to the bad scenario, and we need to expect a huge decline in output in March. But in terms of the headline number it looks a little bit better than our worst case scenario.

“We have to expect some drag from the power outage and lingering effects of the supply chain for at least April and maybe we will see a rebound in May and June, with some effects from the power outage through summer.”

“The near-term effects are not straightforward, and the picture is unclear through to the end of the year.”

JUNKO NISHIOKA, CHIEF ECONOMIST JAPAN, RBS SECURITIES, TOKYO

“It doesn’t fully reflect the total effect of the earthquake. To get the fuller picture, we need to wait for the next survey in April or we have to see other surveys like Quick, which indicated that corporate sentiment has slumped to the lowest level since after the Lehman crisis.

“Business confidence has declined sharply. That’s the reality. We are going to see a drop in economic growth.”

TAKESHI MINAMI, CHIEF ECONOMIST, NORINCHUKIN RESEARCH INSTITUTE, TOKYO

“The impact from the power outage, supply chain disruption and a halt of many factories’ activity after the quake is large. The outlook for business activity depends on progress in reconstruction and recovery.

“There is a possibility that the PMI index will further weaken, although it is unsure at the moment whether the index will plunge to the level seen after the Lehman collapse.

“It is a major issue now how the nuclear crisis develops, and stock market players are also closely watching it.

“Not only production but also consumption may plunge if the government seeks financial resources for disaster relief by raising taxes.”

BACKGROUND:

— The March 11 quake and tsunami, which devastated coastal areas of northeast Japan and left 27,500 people dead or missing, also shut down factories in the region and disrupted supply chains.

— Power blackouts in the region served by Tokyo Electric Power Co (9501.T: Quote, Profile, Research), which lost two nuclear plants in Fukushima and numerous thermal plants, have further hurt production and distribution.

— The survey was conducted between March 11 and 25, with about one-third fewer respondents than usual. There has been no comparable government survey showing the quake’s impact on manufacturing activity.

(Reporting by Rie Ishiguro and Mantik Kusjanto; Editing by Michael Watson)

Instant view: Quake drives Japan manufacturing PMI to 2-year low