Japan’s manufacturing sector slipped back into contraction in July, ending a brief period of stability, as weak demand weighed on output and new orders, according to the latest S&P Global survey.
The Japan manufacturing purchasing managers’ index (PMI) dropped to 48.9 in July from 50.1 in June, falling below the key 50.0 mark that separates growth from decline. The reading was broadly in line with the flash estimate of 48.8.
Most survey responses were collected before last week’s Japan-U.S. trade agreement, which lowered tariffs on Japanese goods to 15% from a threatened 25%. Economists suggest the deal could boost client confidence and support sales in the coming months.
Output contracted at the sharpest pace since March, with firms citing reduced new business volumes. New orders continued to shrink, though at a slower rate than June. Despite weaker demand, manufacturers increased staffing levels, but job creation slowed to a three-month low.
On pricing, input cost inflation eased to its lowest level in over four years, while output prices rose at the fastest pace in a year as companies passed on higher costs to customers.
Business confidence improved to a six-month high, driven by expectations of stronger demand and easing trade-related uncertainties over the next year.
The contraction highlights ongoing challenges for Japan’s manufacturing industry, underscoring the sector’s sensitivity to global trade conditions and domestic demand shifts. Investors will closely watch whether the recent tariff relief translates into sustained recovery in the months ahead.