Government stimulus is similar to giving a tired child a bag full of candy; they’ll get a quick burst of energy but soon they experience a crash. We are currently seeing this analogy come to fruition in Japan. After the earthquake in 2010 their government implemented a stimulus plan to strengthen their economy. However, just like a sugar high, the stimulus is quickly wearing off and their manufacturing industry is going downhill. MarkIt reveals the details in their latest PMI report:
June data pointed to the first month-on-month reduction in manufacturing output since December 2011, as both new business and new export orders fell. Backlogs of work decreased as a result, while employment growth eased to only a marginal rate. On the price front, factory gate charges fell further in June, in response to a first reduction of average costs in 20 months.
After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) dipped fractionally below the neutral 50.0 threshold in June, to post its lowest reading in seven months. At 49.9, down from 50.7, the index was at a level indicative of little change in manufacturing sector operating conditions.
“June data suggest that Japan’s manufacturing sector upturn is fading into mid-year, with output and new business falling simultaneously for the first time since December 2011.
Growth in the year to date has been supported by earthquake-related reconstruction projects. The latest survey findings indicate that the boost from these efforts is starting to ebb, however, with investment goods producers noting a particularly sharp fall in output during June. This bodes ill for growth heading into the second half of the year, especially given the fragility of demand in external markets – highlighted by an accelerated fall in new export business during June.”