Japanese manufacturing output continued to decline at the start of Q1-25, with output and new order flows falling significantly, although the decline was less severe than in previous months. The decline was mainly due to weaker sales and lack of confidence in domestic and international markets. These negative conditions were reflected in lower employment levels, lower purchasing activity, and a backlog of backlogs.
Price pressure and input costs
On the price front, input costs continued to rise significantly, reaching their highest levels since August 2024, prompting manufacturers to raise their prices to meet these challenges. The rise in input prices was a result of higher labor and raw material costs, which contributed to the pressure on manufacturers, who in turn raised their selling prices. However, this increase in prices was faster than in previous months.
Manufacturing PMI Evolution
Following 49.0 in February, the Manufacturing PMI rose to indicate a further deterioration in the sector, although not as sharply as in January 2025. The data also showed that the intermediate goods and investment goods sector declined more sharply than the consumer sector, which saw some slight improvement. Thus, the index continued to indicate a deterioration in operating conditions in the manufacturing sector.
Declining output and weak new orders
In February, manufacturing production continued to decline for the sixth consecutive month, although the rate of decline was modest. According to the data, this decline was mainly linked to a decline in new orders, along with excess inventories at manufacturers. Reports also showed that new orders have been declining continuously since June 2023, with a notable decline in overseas markets, especially in the United States and China, casting a shadow over the sector’s growth.
The impact of weak demand on purchasing and inventories
The challenging conditions were also reflected in lower purchases amid weak demand, which led to an erosion in input stocks, with survey respondents citing the decline as a result of weak demand in both domestic and international markets. The data also showed that delays in receiving inputs continued for the sixth consecutive month, which contributed to extended delivery times.
Forward outlook and rising prices
Despite continued weak demand in the sector, manufacturers remain optimistic about future production prospects. However, expectations declined significantly from previous months, reaching their lowest level since June 2020. The main reasons behind this positive outlook were the expected increase in mass production of new products, despite concerns about the potential negative effects of US protectionist policies, as well as slow growth in the domestic market.
Business sentiment on employment and delivery times
Many companies in the manufacturing sector reported continued stagnation in employment levels amid ongoing market pressures. While employment declined significantly, companies were less concerned about capacity pressures. This is due to weak demand, which reduced the need to increase headcount. Consequently, employment remained low in many companies, which continued to rely on their existing workforce to cope with the difficult conditions.
As for delivery times, delays in receiving inputs continued for the sixth consecutive month, reflecting the lengthening of the waiting period in the supply chain. Survey respondents attributed these delays to several factors, such as weak demand and also complications related to the global economic situation. These delays in supply have forced companies to adjust production schedules and adjust their production plans in line with available inventory.
Data Collection Methodology and Indicator Analysis
Therefore, the impact on delivery times remained evident, with longer than usual delays recorded, adding new challenges for companies seeking to maintain continuous production and achieve a balance between supply and demand.
The survey collects Japanese Manufacturing PMI data through monthly questionnaires sent to approximately 400 manufacturing companies across various sectors. A panel selects these companies, representing various industrial sectors, company sizes, and employee numbers. This diversity in the sample aims to ensure a comprehensive representation of the performance of the Japanese manufacturing sector.
The survey collects responses in the second half of each month and reflects trends and changes compared to the previous month. Based on these responses, the Purchasing Managers’ Index (PMI) calculates as a composite measure that reflects the overall performance of the sector.
The calculation of the index includes five main variables:
- New orders (30%): It is considered one of the most important factors affecting manufacturing activity.
- Output (25%): It measures the volume of production in the sector.
- Employment (20%): It reflects the change in the level of employment.
- Supplier delivery times (15%): It reflects the speed of receiving inputs from suppliers.
- Purchase inventories (10%): It measures inventory levels in manufacturers.
The index calculates based on the total percentage of responses indicating an increase or decrease in activity compared to the previous month. The data adjusts seasonally to provide an accurate analysis that reflects the true economic performance of the sector. The index value ranges from 0 to 100, where a number above 50 indicates an increase in activity compared to the previous month, while a number below 50 indicates a decline in activity.
