(Reuters) - Japanese manufacturing activity slumped to a two-year low in March and posted its steepest monthly decline on record as a devastating earthquake and tsunami disrupted supply chains and production operations, a survey showed on Thursday.
The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 46.4 in March, the lowest since April 2009 and down from February's 52.9.
The data provided one of the first quantitative assessments of the severe damage to production from the March 11 quake and tsunami in northeast Japan, which triggered a nuclear safety crisis and widespread power shortages.
"The impact from the power outage, supply chain disruption and a halt of many factories' activity after the quake is large. There is a possibility that the PMI index will further weaken," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
"It is a major issue now how the nuclear crisis develops, and stock market players are also closely watching it. The outlook for business activity depends on progress in reconstruction and recovery."
Japan's government is struggling to contain the world's worst nuclear crisis in 25 years that triggered wide power outage, while carrying out a huge humanitarian relief effort following the March 11 quake and tsunami that devastated coastal areas of northeast Japan and left 27,500 people dead or missing.
It is set to compile several extra budgets to cope with the disaster with the first likely due next month but it will initially focus on urgent steps such as construction of temporary housing, leaving markets few clues about when reconstruction demand will start to give a much needed lift to the economy.
In the survey, the headline index slipped below the 50 threshold that separates contraction from expansion for the first time in three months, while the extent of the drop from the previous month exceeded those seen after the attacks of September 11, 2001, and the collapse of Lehman Brothers in 2008.
"Suppliers' delivery times lengthened at a survey record pace amid widespread disruption in the supply chain resulting from the disaster," said Alex Hamilton, economist at Markit.
"These delays could affect production in coming months and drive input price inflation even higher than the two-and-a-half year peak seen in March."
The output component of the PMI index dropped to a two-year low of 37.7 in March from 53.9 in February, logging the fastest decline on record with a number of respondents saying rolling blackouts and logistical problems in their supply chains restricted production, the survey showed.
The index for new orders also dropped to a two-year low of 39.6 from February's 54.3. Some manufacturers responded that customers had to cancel or postpone orders.
Dealing an additional blow to manufacturers, the input price index increased to 65.2, the highest since September 2008, due to higher costs of raw materials such as crude oil and naphtha.
The survey, conducted between March 11 and March 25, received only two-thirds of its average number of responses.