Japan's factory activity shrinks at the fastest pace in over two years

Japan's manufacturing activity shrank at its fastest pace in two-and-a-half years in February, according to a business survey. The 'au Jibun Bank' flash Japan Manufacturing Purchasing Managers' Index (PMI), a leading economic indicator, fell to a seasonally adjusted 47.4 in February from a final 48.9 in the previous month. The methodology shows 50 divided growth from contraction.

The latest contraction was attributed to the severe impact of the COVID-19 pandemic on global supply chains and manufacturing activity. The ongoing semiconductor chip shortage, which has affected the production of automobiles and electronic devices, has also contributed to the fall in Japan's PMI.

Japan's shrinking manufacturing: What does it mean?

The weak PMI reading highlights Japan's challenges in reviving its economy amid the pandemic. The country, meanwhile, has struggled to contain the virus, with new cases rising daily and the vaccination drive progressing slowly.

The most recent PMI numbers also emphasise Japan's need to focus its efforts on economic recovery.

ALSO WATCH |Worrying sign for Japan's economy as factory activity sinks | World Business Watch

The government approved a new $708 billion stimulus package for the Japanese economy, including initiatives to promote digitalization and green energy.

More growth measures needed

Experts caution that additional difficulties could arise for the nation in the upcoming months as the pandemic continues to disturb global demand and supply systems. If there is an increase in cases in Japan during the forthcoming Olympic Games, which are scheduled to take place in Tokyo this summer, the issue could worsen.

To stimulate the economy, the Bank of Japan has indicated that it will continue to pursue an accommodative monetary policy, including low-interest rates and purchasing government bonds. The central bank has initiated a review of its monetary policy framework in the current economic context, to ensure the efficacy of transmission.

The pandemic and the disruptions in the global supply chain continue to pose serious problems for Japan's manufacturing industry. The road to economic recovery is still lengthy and needs to be clarified, notwithstanding the government's stimulus package and the Bank of Japan's accommodative policies.

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