Japan’s manufacturing sector remains in expansion but is losing momentum as cost pressures rise and confidence weakens, with the Middle East conflict feeding through into inflation and uncertainty.
Summary:
- Japan manufacturing PMI eased to 51.6 (prev. 53.0), still in expansion
- Growth slowed but remains second-strongest since mid-2022
- New orders, output and employment all expanded at softer pace
- Input cost inflation surged to fastest in ~19 months, driven by energy
- Business confidence weakened amid Middle East war uncertainty
Japan’s manufacturing sector continued to expand in March, though momentum slowed notably as rising costs and global uncertainty began to weigh on activity.
The S&P Global Manufacturing PMI eased to 51.6 from 53.0 in February, indicating a slower but still solid pace of improvement. Despite the moderation, the reading remains among the strongest seen since mid-2022, suggesting the sector retains a degree of underlying resilience.
The loss of momentum was evident across key components. Growth in output and new orders continued but at a more modest pace, reflecting softer demand conditions. Firms cited continued strength in areas such as semiconductors, AI-related products and automotive demand, though the overall expansion in new business slowed compared to recent months. Export orders also rose, but at a reduced rate.
Employment increased for a third consecutive month, but hiring growth also moderated. While firms continued to expand capacity, labour shortages persisted and hiring was not sufficient to prevent a further buildup in backlogs of work.
At the same time, cost pressures intensified. Input prices rose at the fastest pace in over a year-and-a-half, driven by higher energy and raw material costs, as well as the impact of a weaker yen. Survey respondents explicitly linked part of the increase to the Middle East conflict, which has disrupted energy markets and supply chains.
Firms responded by raising output prices, with selling price inflation accelerating to one of the fastest rates in recent months, indicating ongoing pass-through of higher costs.
Business confidence weakened compared to February’s recent highs, as companies expressed concern over the global outlook and the persistence of geopolitical risks. While some firms remain optimistic about demand tied to structural growth areas such as AI and defence, the near-term outlook has become more uncertain.
Overall, the data suggest Japan’s manufacturing sector remains in expansion but is increasingly facing headwinds from rising costs and slowing demand, complicating the policy backdrop for the Bank of Japan.
This article was written by Eamonn Sheridan at investinglive.com.