TOKYO, Nov 4 - Manufacturing activity in Japan expanded in October at its fastest pace in at least two years as factories digested a swell of orders, particularly from the domestic market, a survey showed on Tuesday. The headline index in the /Nomura/JMMA Purchasing Managers survey rose to 55.6, the strongest reading since the poll was launched in October 2001 and above the crucial 50 level for a fifth straight month. The index stood at 53.0 in September. A reading above 50 in the purchasing managers index (PMI), which gives an early snapshot of manufacturing activity, suggests an expansion while a figure below it indicates a contraction. "Driving the increase in the PMI was a marked acceleration in growth of new orders to the fastest pace seen over the past two years," the PMI report said. "New orders from both home and abroad were reported to have increased at faster rates than in September, with the domestic market again showing the greater strength." The new orders index leapt to a record 60.9 in October from 56.2, above 50 the fifth month in a row.
The buoyant PMI numbers correspond with government data released on Wednesday showing industrial output rose 3.0 percent in September from a month earlier, double the consensus forecast for a gain of 1.5 percent. The output index in the PMI survey rose to 58.7 in October from 54.4, showing output expanding at the fastest pace in the survey's short lifetime and reflecting a lift in all the main sectors of manufacturing.
EXPORT UPTURN
The export orders index rose to 53.1 from 50.3 in September despite the yen's rise against the dollar, with demand from China and Southeast Asia particularly strong. "Despite the continued strength of the yen against the U.S. dollar, the rate of growth (in export orders) accelerated from the near-stagnation seen in September to record the sharpest monthly rise in overseas demand since July of last year," the report said. The yen rocketed to a three-year high of 107.86 per dollar last week, up more than 10 percent from a recent bottom around 120 in August. The government is concerned that a strong yen could dent exporters' profits and snap a fragile economic recovery. Japan has sold more than 16.2 trillion yen ($146 billion) in the foreign exchange market so far this year to sap its strength. Overall, new orders rose faster than firms could deliver, reflecting a failure to adjust rapidly to the spike in demand but boding well for production in the near term, the report said. The backlog index climbed to a record 56.6 from 53.3, above 50 for the third straight month. Its growth contrasted with falling backlogs in the 12 months to July and was indicative of sustained output expansion in the coming months, the report said.
Increased factory activity, however, failed to result in more jobs and the employment index dipped to 49.1 from 49.5. Another source of concern is continued deflationary pressure on prices at the factory gate. The input prices index edged up to 50.5 in October from 48.3 in September, but the output prices index slipped to 44.8 from 45.0, having never risen above 50. "Stronger demand for raw materials resulted in a marginal rise in input prices in October for the first time in four months," the PMI report said. "But output prices continued to fall as manufacturers' pricing power remained weak." The PMI figures come on the heels of a Bank of Japan report, released on Friday that showed most Policy Board members expect deflation to persist in 2004/05. ($1=110.84 yen)//