Japan's manufacturing activity gains steam

Japanese manufacturing activity expanded last month at the fastest pace since a record earthquake and nuclear disaster in 2011, a survey showed yesterday, suggesting the economy has been able to stage a full recovery because of strong domestic demand and recovering exports.

The Markit/JMMA manufacturing purchasing managers' index rose to a seasonally adjusted 52.5 from 52.2 in August.

It remained above the 50 threshold that separates contraction from expansion for the seventh consecutive month and showed that activity expanded at the fastest since February 2011, one month before the natural disaster struck the northeast coast.

The output component of the index also rose, to 53.8 from 53.5, to show the fastest growth since the earthquake.

The encouraging numbers, coming just before Premier Shinzo Abe issues his long-awaited decision on raising sales taxes, followed a slip in August, when tepid export and consumer demand at home brought down industrial production by 0.7 per cent from July.

That drop - reversing a 3.4 per cent rise in July - was one of the last pieces of economic data that Tokyo will be able to study before issuing a decision today on whether to raise the sales levy, a move some fear will derail the fledgling economic recovery. Also due today are household spending data and the central bank's quarterly tankan survey, a widely watched indicator of confidence in the corporate sector.

A corporate survey included in the data yesterday showed manufacturers have a bright outlook, with the sector expecting a 5.2 per cent growth for last month and 2.5 per cent this month.

Early signs suggest Abe's blueprint for stoking growth - dubbed "Abenomics" - is having a positive effect, with the world's third-largest economy expanding again in the June quarter as cautious firms increased their capital spending.

But his decision on raising the tax levy to 8 per cent from 5 per cent, seen as crucial to chopping the country's massive national debt, threatens not only to sink Abe's growth plans; it could also dim his popularity with voters.

Few, however, see Abe as having much choice, given the size of the national debt, proportionately the worst in the rich world at more than twice the size of the economy.

The International Monetary Fund, among others, has been calling on Tokyo to fix its books, after debt agencies cut their ratings on Japan's credit.

Some expect the Bank of Japan's closely watched tankan survey to hit a three-year high, possibly the tipping point that will give Abe the green light to implement a tax rise that was passed by the administration he booted out of office.

In a bid to soften the impact, Abe is expected to unveil a one-time US$50 billion stimulus package with benefits for low- income earners and corporate incentives to boost investment.

A cut to the corporate tax rate is also reportedly in the government's sights, although the timeline remains unclear.

If Abe does follow through on the tax increase, as expected, all eyes will turn to the Bank of Japan to see if its expands its monetary easing drive to counter any downturn from the higher levy.

Reuters, Agence France-Presse