Japan's manufacturing contracts as trade uncertainties dampen output
It recorded its sharpest drop in manufacturing output since March
Japan's manufacturing sector slipped back into decline in July after a brief stabilisation, as trade uncertainty and subdued demand prompted companies to cut production for the tenth time in eleven months.
The country's Purchasing Managers' Index fell from 50.1 in June to 48.9 in July, marking a return to contraction territory. Any reading below 50 indicates a shrinking sector, and this represented the twelfth deterioration in the past 13 months.
Manufacturing output dropped at its sharpest rate since March, with companies citing reduced inflows of new business as the primary reason for cutting production. Total new orders continued to decline, though at a slightly softer pace than in June, whilst export demand fell at its gentlest rate in four months.
Manufacturers blamed the lacklustre performance on subdued market conditions and customer reluctance to commit to new orders amidst ongoing uncertainty surrounding US trade tariffs. However, the survey data were collected mostly before the US-Japan trade agreement, which established a baseline tariff of 15% on goods.
The demand slump prompted companies to slash purchasing activity at the steepest rate in 17 months, whilst inventory levels were pared back across both pre- and post-production stocks. Supply chain performance also deteriorated marginally, with longer lead times attributed to staff and stock shortages at suppliers.
Despite the production cuts, Japanese manufacturers continued to expand their workforce in July. Some firms hired to fill vacancies whilst others increased headcounts in anticipation of stronger customer demand in the coming months—a sign of cautious optimism despite current difficulties.
This hiring activity, combined with lower sales, enabled companies to reduce their backlogs of work at the most pronounced rate in six months.
On the pricing front, manufacturers enjoyed some relief as input cost inflation eased to its weakest level in four and a half years. However, selling prices rose sharply at the quickest pace in a year, as companies felt more confident about passing recent cost increases onto customers.
"With a trade deal with the US now agreed, it will be important to see if this will translate into greater client confidence and improved sales in the months ahead," said Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence.
Business confidence improved notably, reaching its highest level in six months. Companies expressed hopes that better demand conditions and reduced trade-related uncertainty would support growth over the next twelve months, suggesting the recent trade agreement may already be lifting spirits in Japan's industrial sector.
