Japanese manufacturing stabilises after 5 months of decline

New orders fell at its slowest pace in 19 months as factories maintain employment levels.

Japan's manufacturing sector steadied at the end of 2025, halting five months of deterioration as new orders declined at a notably slower pace and production levels stabilised.

The S&P Global Japan Manufacturing Purchasing Managers' Index (PMI) reached the neutral level of 50.0 in December, up from 48.7 in November, indicating stable business conditions at year-end. A reading above 50 signals expansion, whilst below indicates contraction.

The stabilisation came as welcome relief for an industry that has struggled through much of the latter half of 2025, with the turnaround driven largely by a marked improvement in demand conditions.

A key factor lifting the PMI reading was a much slower and only marginal reduction in overall new business in December. The latest decline in new orders was the softest since May 2024. Whilst companies often noted that demand conditions remained relatively subdued, some firms recorded an improvement in sales amidst new projects and stronger-than-anticipated customer spending.

New export orders fell at a slightly slower and modest rate at the end of 2025. Lower overseas sales were partly linked to weaker demand across Asia, and for semiconductors in particular.

Companies signalled that output volumes were broadly stable in December. Production fell at a negligible pace that was the slowest seen over the current six-month sequence of decline.

In line with the trend for output, purchasing activity decreased at the softest rate in six months and only marginally. Manufacturers continued to lower their inventory levels in December, partly linked to muted demand conditions. Stocks of purchases were depleted at a slower but still solid rate, whilst inventories of finished items fell at the second-steepest pace since September 2020.

Data broken down by subsector indicated that conditions improved across the consumer and investment goods segments, but weakened for makers of intermediate goods.

Firms raised their staffing levels again in December, often due to expectations of stronger customer demand in the months ahead. Though marginal, the rate of job creation was the best seen in four months. This supported a further reduction in outstanding business, though the rate of backlog depletion was the slowest recorded in 18 months.

The time taken for purchased items to be delivered to Japanese manufacturers continued to lengthen at the end of the year amidst reports of material shortages and increased shipping times. That said, the rate at which vendor performance deteriorated was modest and slower than the series' long-run trend.

On the prices front, average input costs rose at a sharp and accelerated rate in December. The rate of inflation was the steepest recorded since April, with a number of firms attributing the rise in expenses to higher raw material and labour costs, along with a weak yen. As a result, factories increased their selling prices again in December and at a solid pace.

Optimism regarding the one-year outlook for output was sustained in December. The degree of positive sentiment slipped from November's recent high, but remained above the survey's long-run average. Firms often hoped that new product releases and a recovery in customer demand would drive production higher over the course of 2026.

Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence, said: "Japan's manufacturing industry saw conditions stabilise at the end of the year, with factories reporting a much weaker reduction in sales and largely steady production levels.

"There was also good news on the employment front, with staffing levels rising at a slightly quicker pace as firms projected greater demand in the months ahead. This optimism was also reflected in output projections, with the degree of positive sentiment the second-highest seen since January. New product releases and greater demand across key industries such as autos and semiconductors were all anticipated to boost the sector's performance in 2026. However, a number of firms expressed concerns over relatively sluggish global conditions, an ageing population and rising costs.

"There were signs of stronger cost pressures in December, with input prices rising at the sharpest rate since April as higher raw material and labour costs, along with a weak yen, pushed up expenses. This led firms to raise their charges solidly as they looked to ease pressure on margins."

The data suggest Japan's manufacturing sector enters 2026 on more stable footing, though headwinds from weak global demand, demographic challenges and inflationary pressures remain significant concerns for the year ahead.