Japan’s Business Activity Slumps as Inflation and Trade Woes Bite

Japan's business activity contracted for the first time in five months in March, according to preliminary PMI data released Monday, signaling growing economic headwinds. The au Jibun Bank Composite PMI dropped to 48.5 from 52.0 in February, reflecting a sharp slowdown in both manufacturing and services.

Manufacturing PMI slipped to 48.3 in March, down from 49.0 in February and missing expectations of 49.2. This marks the ninth straight month of contraction, driven largely by weakening overseas demand. New export orders declined as concerns grew over potential trade disruptions, with markets bracing for new U.S. tariffs expected to be unveiled by former President Donald Trump on April 2.

Japan’s service sector, which had been a pillar of recent economic growth, also shrank for the first time since mid-2024. The services PMI fell to 49.5 in March from 53.7 in the previous month. Persistent inflation and rising input costs weighed heavily on demand, as consumer sentiment softened amid higher prices and borrowing costs.

Economists note that sticky inflation—still above the Bank of Japan’s target—alongside rising interest rates is putting pressure on private spending and overall business sentiment. The dip in both manufacturing and services reflects broader concerns about Japan's economic resilience amid global uncertainty.

As private consumption slows and trade tensions rise, Japan’s near-term growth outlook appears increasingly fragile. The weaker-than-expected PMI figures could add pressure on policymakers to address the inflationary environment while supporting economic stability.

With Japan’s economy facing both internal and external challenges, all eyes are now on the government’s next steps—particularly in navigating trade policy impacts and curbing inflation without derailing recovery momentum.