Japan's factory activity shrinks on falling export orders, PMI shows

Tokyo: Japan's factory activity shrank in August on decreasing orders from overseas, a private sector survey showed on Monday, as the impact of US tariffs began to squeeze the country's export-reliant manufacturing sector.

The S&P Global Japan Manufacturing Purchasing Managers' Index (PMI) was at 49.7 in August, which slightly undershot the flash reading of 49.9 but improved from 48.9 in July.

The figure has stayed below the 50.0 threshold, which indicates contraction, for two consecutive months.

While the pace of factory output contraction slowed and contributed to the headline index's improvement, new orders continued to fall at the same pace as in July, given subdued market conditions, the survey showed.

"Of particular concern was a steeper drop in new export business, which fell at the sharpest pace in nearly a year-and-a-half," said Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence.

The decrease in new orders from overseas was the fastest since March 2024, and firms referred to weaker demand from key markets such as China, Europe and the United States, according to the survey.

In July, Japanese exports logged the biggest drop in more than four years led by declining car exports to the United States, and industrial production fell more than expected, government data have shown.

Tokyo and Washington struck a trade deal in July to lower U.S. tariffs on Japanese goods in exchange for a US-bound $550 billion Japanese investment package, but uncertainties remain around the implementation of the agreed terms.

Elsewhere in the PMI survey, employment was a bright spot, with firms adding staff for the ninth straight month to prepare for potential future demand increases.

However, companies' business confidence slipped to a three-month low, with respondents citing concerns about customer demand, an ageing population and US tariffs, according to the survey.

Input cost inflation inched up from July's four-and-a-half-year low, but selling prices rose at the slowest pace in more than four years. Some firms said intense market competition and customer requests for discounts affected their pricing power, according to the survey.