Japan Manufacturing Contraction Eases as Services Slow in December

Japan’s manufacturing activity contracted at a slower pace in December while the services sector lost momentum. The S&P Global flash Japan Manufacturing Purchasing Managers’ Index (PMI) climbed to 49.7 from 48.7 in November, marking the sixth consecutive month of contraction but at a reduced rate.

The services PMI fell to 52.5 from 53.2, pulling the composite PMI down to 51.5 from 52.0 in November. These readings indicate that while overall activity remains in expansion territory, growth slowed at the end of 2025.

Manufacturing PMI Shows Signs of Stabilisation

The manufacturing PMI improved to 49.7 in December, narrowing the gap from the 50.0 threshold that separates expansion from contraction. This was the highest reading in six months, suggesting easing pressure on factory output.

Demand for goods fell at the slowest pace in 18 months, and output declined only slightly compared to November. Despite the improvement, the sector remains in contraction, reflecting persistent challenges from global economic uncertainty and rising input costs.

Services Sector Growth Moderates

Japan’s services PMI slipped to 52.5 in December from 53.2 in November, indicating slower growth in the sector. The decline contributed to a composite PMI reading of 51.5, down from 52.0 in the previous month.

While services activity continues to expand, the pace of growth has softened amid cautious consumer spending and inflationary pressures. Both goods and services firms raised selling prices as cost burdens increased, adding strain to demand conditions.

Business Confidence and Employment Trends

Looking ahead to 2026, business confidence remained positive but weakened compared to November, particularly in manufacturing. Firms cited global economic conditions, an ageing population, and rising costs as key risks to growth.

On the positive side, employment rose at the fastest pace since May 2024, and outstanding business expanded at the quickest rate in two-and-a-half years. These trends suggest resilience in labour markets despite slowing output growth.

Bank of Japan Survey Highlights Mixed Outlook

A quarterly Bank of Japan survey released on December 15 showed large manufacturers’ sentiment at a four-year high for the October–December period. However, companies expect conditions to deteriorate in the next three months due to higher U.S. tariffs and weak domestic consumption.

Inflation accelerated at the fastest pace in eight months, prompting firms to increase selling prices across sectors. These factors underline the challenges facing Japan’s economy as it enters 2026.

Read More: Japanese Big Property Firms Increase Their Bets on India’s Hot Property Market.

Conclusion

Japan’s December PMI data reflects a mixed picture for the economy at year-end. Manufacturing contraction eased, supported by slower declines in demand and output, while services growth moderated.

Business confidence remains positive but fragile amid global and domestic headwinds. Rising costs and inflationary pressures will continue to shape economic conditions in the coming months.

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