The health of Japan’s manufacturing sector deteriorated for the seventh straight month at the start of 2025, reflecting deeper declines in output levels and new order flows. The outlook for demand in the near and medium term also looked subdued as the level of existing work fell sharply and business confidence fell to its lowest level in just over two years.
Optimism remained strong overall, however, and firms continued to hire additional staff. Average operating expenses rose at the weakest rate since last April, albeit well above the series average. At 48.7 in January, the headline Jibun Bank of Japan Manufacturing Purchasing Managers’ Index (PMI) – a single-digit composite measure of manufacturing performance – fell from 49.6 in December to signal a modest decline in overall operating conditions that was nonetheless the most pronounced since last March.
Output fell for the fifth straight month at the start of the year, with the seasonally adjusted index pointing to a moderate decline in output levels.
Moreover, the contraction was the sharpest in ten months, with firms often citing a lack of new orders as the reason for production cuts. New orders placed with Japanese manufacturers also fell in January, at a moderate pace that was the most pronounced for six months. Where sales declined, firms reported continued weakness in customer confidence, particularly in the semiconductor and automotive sectors. International demand was also weak, with new export sales contracting, although the latest decline was the weakest in the current 35-month-plus sequence. In the absence of new orders, goods producers opted to complete existing orders, as indicated by another sharp drop in backlogs of work.
Business confidence positive in January
At the same time, firms reported that additional experienced staff were being hired as part of efforts to stimulate sales, contributing to a second straight monthly increase in employment levels.
Business confidence remained positive in January, reflecting expectations of successful new product launches and customer numbers. Firms were also hopeful of a broader economic recovery, with the automotive and semiconductor sectors notably in focus. However, confidence fell during the month to its lowest level since December 2022. Input purchases fell for the fourth straight month in January, with the latest decline being the sharpest since last March amid lower production requirements. Weakness in production and demand also contributed to the continued decline in pre- and post-production inventory holdings, as manufacturers chose to adjust inventories in line with the current subdued demand environment.
However, there was evidence of deteriorating vendor performance in January, although the extent of lengthening delivery times was the weakest in the current five-month sequence and was only partial. Survey price indicators showed that inflationary pressures remained elevated across the Japanese manufacturing sector. Firms cited rising labor, logistics, raw materials and utilities prices as key factors behind higher cost burdens.
On a positive note, the inflation rate eased from December to a nine-month low. Firms chose to pass on higher costs partly to customers through higher output prices, although the inflation rate of fees also eased during the month. S&P Global compiles the Bank of Japan Manufacturing PMI from responses to monthly questionnaires sent to purchasing managers in a panel of about 400 manufacturers. The panel ranks companies by detailed sector and workforce size, based on contributions to GDP. Survey respondents submit their responses in the second half of each month and indicate the direction of change compared to the previous month.
A leading indicator of economic health
The Jibun Bank report stated that manufacturing output contracted at a slower pace at the end of the previous year, with the decline this month remaining slight compared to the previous month. Firms indicated that weak demand was mostly due to slower production.
Manufacturers also indicated a lower preference for using existing stocks rather than buying new supplies, with the rate of drawdown of finished goods inventories being modest.
At the same time, export demand remained weak amid weak demand in key markets, particularly China and the US.
It is a leading indicator of economic health – companies react quickly to market conditions, and purchasing managers are likely to have the most up-to-date and relevant view of the company’s view of the economy;
Above 50.0 indicates an expansion in the industry, below that indicates a contraction. The “previous” listed is the “actual” from the Flash version, so the “history” data will appear disconnected. There are two versions of this report released approximately a week apart – Flash and Final. The Flash version, which the source first reported in May 2014, is the oldest and therefore tends to have the greatest impact;
A diffusion index is calculated for each survey variable. The index is the sum of the percentage of “high” responses and half the percentage of “unchanged” responses. The indexes range from 0 to 100, with a reading above 50 indicating an overall increase compared to the previous month and below 50 indicating an overall decrease. The indexes are then seasonally adjusted. The headline figure is the Purchasing Managers’ Index (PMI).
