Japan Manufacturing Deteriorates at Fastest Pace in Nine Years After Quake

Japan’s manufacturing deteriorated at the fastest pace in at least nine years in March, underscoring forecasts for the economy to shrink in the aftermath of the March 11 earthquake.

The index of purchasing managers fell to 46.4 from 52.9, the Japan Materials Management Association and Markit Economics said in a joint release today, the biggest drop since the survey began in October 2001. A number below 50 indicates a contraction.

The March 11 quake and tsunami in northeastern Japan shut factories of companies from Toyota Motor Corp. (7203) to Sony Corp. (6758), crippled a nuclear energy plant, and has led to a 7 percent drop in the Nikkei 225 Stock Average. An electricity shortage after the disaster is threatening to exacerbate Japan’s post-disaster slump as even intact factories move to conserve power.

“There most certainly will be a recession,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo, who predicts the economy will contract for two more quarters after shrinking at the end of 2010. “We’re going to see big constraints on the supply side for a considerable while.”

Before the temblor, the world’s third-largest economy was showing signs of picking up. Booming demand in China helped export growth accelerate and industrial output unexpectedly increased for a fourth month in February.

Unemployment Slides

In an indication of improvements in the domestic economy, the unemployment rate fell to a two-year low in February and retail sales beat analysts’ forecasts.

This month’s disaster has prompted analysts to downgrade their growth projections for the nation’s economy. Economists at Goldman Sachs cut their forecast for the year starting April to 0.7 percent from its initial estimate of a 1.3 percent expansion. Capital Economics Ltd. is projecting gross domestic product will probably drop for two more quarters, with zero growth for 2011 as a whole.

New orders fell at the fastest pace in two years, while lead times lengthened and output slid, according to today’s report.

Japan Tobacco Inc., the world’s third-largest publicly traded cigarette maker, said it won’t ship products domestically from March 30 to April 10 because of damage to five of its plants. Nissan Motor Co. Chief Executive Officer Carlos Ghosn said it will take the automaker until mid-April to resume major production at its plant in Iwaki, Fukushima prefecture.

Rolling Blackouts

Tokyo Electric Power Co. has begun rolling blackouts in the capital and its surrounding area after a tsunami knocked out its Fukushima Dai-Ichi nuclear plant. Toyota Motor said automakers may want to consider taking turns in running assembly lines to save energy, while companies such as Tokyo Steel Manufacturing Co. are already shifting production west because of the power disruptions.

The suspension of manufacturing after disaster may be even worse than the reported figure, David Rea, Japan economist at Capital Economics in London, said before today’s report.

“This is what statisticians call survivor bias,” Rea said. “Businesses that haven’t been able to send back their responses are the ones that have been damaged the most.”

Markit and JMMA said they received only 5 percent of the average number of replies from respondents in the Tohoku region, which incurred the most damage from the disaster. Data was collected between March 11 and March 25.

The PMI report surveys purchasing managers on whether measures such as orders, product prices and inventory levels have increased or decreased from the previous month. The government’s industrial production report, scheduled for release on April 28 by the Trade Ministry, measures actual amounts produced by factories.

To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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