Japan's Manufacturing Slump Deepens Amid U.S. Tariff Pressure

Japan’s manufacturing sector continued to shrink in May, marking the 11th straight month of contraction as U.S. tariffs weighed heavily on factory output. According to the au Jibun Bank flash manufacturing purchasing managers' index (PMI), activity inched up slightly to 49.0 from April’s 48.7 but remained below the critical 50.0 threshold that separates growth from decline.

The latest data reflect the ongoing challenges faced by Japanese manufacturers, especially in the auto industry, due to trade tensions with the United States. A third round of trade talks between Japan and U.S. officials is expected this week, but uncertainty surrounds any potential tariff relief from the Trump administration.

Factory output declined more sharply than in April, though the pace of decrease in new orders and export business eased. On a positive note, input cost inflation slowed to a 14-month low, and output price inflation dropped to its lowest level in nearly four years, signaling easing cost pressures.

While manufacturers’ business confidence showed a modest rebound after hitting a five-year low in April, sentiment in the service sector weakened. The services PMI dropped to 50.8 in May from 52.4 in April, the lowest since January 2021, as new business, exports, and employment growth all slowed.

As both manufacturing and services sectors faltered, the composite PMI fell to 49.8 from 51.2, pushing overall business activity back into contraction territory. Analysts say persistent global trade uncertainty and weakening foreign demand are clouding Japan’s economic outlook.

The data suggests that without a breakthrough in U.S.-Japan trade negotiations, Japan’s industrial sector will continue to struggle, dragging on broader economic recovery efforts.