Japan Manufacturing Growth Holds Strong in July Despite Middle East Uncertainty

Japan’s manufacturing sector continued to expand in July, supported by the strongest factory output growth in more than a decade, although businesses remained cautious as geopolitical tensions in the Middle East clouded the economic outlook.

According to the latest S&P Global flash Purchasing Managers’ Index (PMI), Japan’s manufacturing PMI edged down slightly to 54.7 in July from 54.8 in June. The reading remained comfortably above the 50-point threshold that separates expansion from contraction, signaling continued strength across the sector.

Factory output surged at its fastest pace since February 2014, while new orders posted their strongest increase in just over five years. The rise in demand helped fuel moderate growth in overall business activity, highlighting resilient conditions for Japanese manufacturers despite ongoing global challenges.

The services sector, however, showed signs of slowing. The flash services PMI slipped to 51.9 from 52.2 in June, reflecting softer growth. Overseas demand also painted a mixed picture, with export orders for manufactured goods rising at the fastest pace in four months, while demand for Japanese services from abroad continued to weaken.

Employment across Japan’s private sector expanded for the 34th consecutive month, and backlogs of work increased at the fastest rate since recordkeeping began in February, indicating sustained business activity and rising workloads.

Inflationary pressures eased modestly as input cost inflation slowed to a three-month low. However, companies continued to raise prices, with service providers recording the fastest increase in output charges in more than 12 years.

Usamah Bhatti, economics associate director at S&P Global Market Intelligence, said the latest data reflected diverging trends between manufacturing and services. He noted that manufacturers continued building inventories of finished goods and raw materials to manage supply chain disruptions and higher costs linked to the Middle East conflict.

Despite remaining optimistic about business conditions over the next year, companies reported weaker confidence than in June due to concerns over higher energy and raw material prices, along with potential supply chain disruptions caused by the conflict. Meanwhile, Japan’s flash composite PMI rose to 53.1 from 52.8, marking its highest reading since February and extending its expansion streak to 16 consecutive months.