Economic Buzz: Stronger service sector growth offsets fresh decline in manufacturing output in Japan

Latest Flash PMI data signaled a further modest increase in overall private sector business activity across Japan during July. However, this masked divergent underlying trends, with stronger growth across the service industry contrasting with a fresh fall in factory output.

At the same time, overall employment and new business rose only marginally across the private sector as a whole. Business confidence meanwhile slipped to a three-month low amid lingering tariff uncertainty, and new orders from overseas declined at the quickest pace since last October.

Turning to prices, firms signalled softer increases in both input costs and output charges at the start of the third quarter, albeit with rates of inflation remaining historically marked overall.

At 51.5 in July, the headline seasonally adjusted S&P Global Flash Japan PMI Composite Output Index was unchanged from June and signaled a further modest increase in overall private sector output.

Business activity has now risen in each of the past four months, with the rate of expansion slightly quicker than seen on average over the first half of 2025.

A solid and accelerated rise in service sector activity contrasted with a renewed drop in factory production during July. Improved activity levels were generally linked by survey respondents to firmer demand conditions and increased client numbers.

Overall business confidence regarding the year-ahead weakened during July, hitting the second-lowest level since August 2020 (after April 2025).

Although the rate of input cost inflation across the private sector as a whole eased to its weakest in just over four years, it remained sharp overall.

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