Manufacturing growth persists in Japan but rising costs darken outlook

It extended its expansion for a fifth consecutive month.

Japanese manufacturers extended their run of growth to a fifth consecutive month in May, with output and new orders rising at historically strong rates — but a near-unprecedented surge in costs is casting a deepening shadow over the sector’s prospects.

The S&P Global Japan Manufacturing Purchasing Managers’ Index eased to 54.5 in May from April’s 51-month high of 55.1, yet the reading still pointed to a marked improvement in overall business conditions and remained comfortably above the long-run survey average. Intermediate goods producers recorded the strongest gains amongst sub-sectors.

Factory output continued to grow at a solid pace, though the rate of expansion slowed from April’s more than twelve-year record. Manufacturers pointed to two drivers: genuine increases in sales, and deliberate efforts to build up inventory reserves as a hedge against supply disruptions fuelled by the ongoing conflict in the Middle East.

New orders mirrored that pattern, rising at a softer but still robust pace. Clients were reported to be placing purchases ahead of need in order to secure safety stocks, with particular demand noted for semiconductors and oil-based products. Notably, export orders bucked the slight overall slowdown, climbing at the fastest rate in five years.

To meet rising production requirements and guard against future shortages and price hikes, purchasing activity accelerated at its fastest rate in four years. Supply chains, however, remained severely strained. Delivery times for inputs lengthened at one of the sharpest rates recorded outside the pandemic period, with manufacturers frequently attributing the delays to the war’s disruption of global logistics routes.

Those bottlenecks hampered stock-building efforts. Inventories of purchased inputs rose only fractionally after a marginal gain in April, while stocks of finished goods were run down as orders were fulfilled.

Employment continued to grow, with payroll additions rising at the second-quickest pace in more than four years. Capacity pressures nonetheless persisted, reflected in a further strong accumulation of outstanding work driven by both rising order intakes and ongoing input shortages.

Cost pressures represented the starkest finding of the month’s survey. Average input costs climbed to their highest level since September 2022, with manufacturers citing dearer raw materials — notably metals and oil-derived products — alongside higher labour and transportation expenses. Selling prices were raised in response at the fastest pace since October 2022. Both input and output price gauges reached levels rarely surpassed in more than 24 years of data collection.

Business confidence edged up from April’s one-year low but remained below its historical average. Firms cited growth in electronics, artificial intelligence and new product development as grounds for optimism, but expressed concern that surging costs and subdued global economic conditions could act as headwinds.

“The current period of expansion is being partly driven by stock building among manufacturers and their clients, as companies looked to safeguard against product shortages and mitigate price risks driven by the war in the Middle East,” said Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence. “Overall inflationary pressures continued to surge in May, with both input and output price indicators reaching levels rarely seen in over 24-and-a-half years of data collection. Surging costs and subdued global economic conditions could act as headwinds in the months ahead.”