Japan's July factory activity slips on weak demand, PMI shows

TOKYO (Reuters) - Japan's factory activity shrank modestly in July on tepid domestic and overseas demand and increased inflationary pressures, a private-sector survey showed on Thursday.

The latest survey comes after the Bank of Japan this week raised interest rates and laid out a detailed plan to reduce its massive bond buying, taking another step towards phasing out massive stimulus.

The final au Jibun Bank Japan manufacturing purchasing managers' index (PMI) fell to 49.1 in July from 50.0 in June.

It was the first time the index dipped below the 50.0 threshold that separates growth from contraction in three months and was little changed from 49.2 reported in the flash PMI.

"The performance of the Japanese manufacturing sector was downbeat at the start of the third quarter of 2024," said Usamah Bhatti at S&P Global Market Intelligence.

New orders declined at fastest pace since March on subdued demand both in Japan and international markets, the survey showed.

Manufacturing slipped in July as demand weakened, especially in the automotive sector.

"Inflationary pressures remained marked," said Bhatti. Despite higher prices, "firms opted to raise their selling prices at a softer rate in order to maintain market competitiveness." he said.

Input prices index accelerated at the fastest pace since April 2023. Firms cited higher costs of raw material, labour, oil and logistics as well as yen's weakness as main factors behind increase in the input prices.

The Japanese currency weakened to a 38-year low against the U.S. dollar last month. [FRX/]

Output prices grew in July but at the softest pace in four months as firms tried to stay competitive, according to the survey.

Despite the gloom, business sentiment remained solid in July as firms expected a recovery in demand both in Japan and overseas, which would help them acquire new clients and promote business expansion plans.

(Reporting by Kaori Kaneko; Editing by Sam Holmes)