According to the data released by Markit/JMMA this week, the headline Purchasing Managers’ Index (PMI) fell to 45 in December, down from 46.5 in November. Any index number below 50 indicates an economic contraction. The continued shrinking of the country's manufacturing activity would increase the likelihood of a sharp contraction in the economy.
“Japan’s manufacturing sector continued to struggle against the dual headwinds of weak domestic and external demand forces during December. Output declined at a marked rate, but it was the severity of the fall in new orders that was particularly worrying, especially for capital goods,” Paul Smith, senior economist at Markit, said in a note.
The continuing debt crisis in Europe and the strength of the yen have also hurt the demand for exports, the key driver of Japan's economy.
“Falling volumes of incoming new business was the primary factor driving manufacturing output lower in December. As was the case with output, the fall in new order volumes was the steepest since April 2011, although the rate of decline was considerably sharper than seen for production,” Markit Economics and JMMA said in a statement.
This report comes after it was revealed this week by the Ministry of Economy, Trade and Industry that Japan’s industrial production, which measures the total inflation-adjusted value of output from manufacturers, mines and utilities, fell 1.7 percent in November compared to a 1.6 percent rise in October.
Earlier this month, the Bank of Japan decided to raise the ceiling on its asset purchase program by 10 trillion yen ($120 billion) to 101 trillion yen. The central bank came under political pressure to announce the stimulus measures after the Liberal Democratic Party (LDP) won a landslide victory in the general elections Dec 16.
Market players sense that more measures, other than the currently available stimulus, will be required to revive the growth momentum. Investors see a critical need for the policymakers to evolve measures that strengthen the growth potential of the economy, which many expect to be announced next year.