Japanese manufacturing returns to growth with strongest performance in 3 years

But inventories continue to decline.

Japan's manufacturing sector  returned to growth in January, recording its strongest performance in nearly three and a half years as output and new orders rose for the first time in months.

The Purchasing Managers' Index from S&P Global climbed to 51.5 from December's neutral reading of 50.0, marking the first improvement in operating conditions since June and the most robust expansion since August 2022.

Manufacturers signalled fresh increases across the board, with new orders rising for the first time since May 2023 and at the fastest pace in nearly four years. Companies attributed the upturn to stronger demand and new product launches. Crucially, export orders also returned to growth for the first time since February 2022, supported by increased demand from key markets including the United States and Taiwan.

Production volumes expanded for the first time since June, rising at the quickest rate since April 2022 and exceeding the long-term average. The improvement was broad-based, with conditions strengthening across all three monitored sub-industries, led by makers of investment goods.

Rising workloads placed greater pressure on capacity, with backlogs of unfinished work increasing for the first time in three and a half years. In response, firms accelerated hiring at the fastest pace in 40 months, marking a solid rate of job creation. Purchasing activity also returned to growth for the first time since September, expanding at the quickest rate in three and a half years.

However, inventories continued to decline. Stocks of raw materials fell at a rate little changed from December as firms used inputs in production, whilst finished goods inventories dropped at the slowest pace in four months, with some companies reporting stock-building amid stronger demand.

Supply chain pressures persisted, with delivery times lengthening at a mild pace unchanged from December due to staff shortages and insufficient stock levels at suppliers.

Inflationary pressures intensified sharply. Input costs rose at the steepest rate in nearly a year, driven by higher labour and raw material costs as well as a weak yen. Manufacturers passed these increases on to customers, pushing selling prices up at a 19-month high.

Despite the positive momentum, business confidence slipped to a three-month low in January, with some firms expressing concerns over inflation and the strength of future customer demand. Nevertheless, companies remained generally optimistic that stronger global demand—particularly for semiconductors and automobiles—and new product launches would drive output growth over the coming year.

Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said the data suggested the sector was gearing up for further output increases. "However, inflation remained a key area of concern for businesses," she noted. "It will be important to monitor the prices data to see if these inflationary pressures intensify, as this could impact customer demand and firms' own investment decisions."

The survey polled around 400 purchasing managers across Japan's manufacturing sector.