Tokyo Factory Activity Report

TOKYO (Reuters) – Japan’s factory activity shrank for the sixth straight month due to lackluster demand, while the service sector continued to grow in December, according to business surveys released on Monday. This situation underscores the economy’s increasing reliance on services.

The au Jibun Bank flash Japan manufacturing purchasing managers’ index (PMI) fell to 49.5 in December from 49.0 in November, remaining below the 50.0 threshold that distinguishes expansion from contraction since June.

Usamah Bhatti, an economist at S&P Global Market Intelligence, noted, “Diverging trends in demand were apparent — service firms reported the strongest new business rise in four months, while goods producers faced a more significant decrease in orders.”

Business confidence in the factory sector dipped to the lowest level since May 2022, driven by ongoing cost pressures. Input inflation rose at the fastest rate in four months, and output prices surged to their highest since July.

On the other hand, the au Jibun Bank flash services PMI increased to 51.4 in December from 50.5 in November. Despite the growth reaching a four-month high, business sentiment fell due to concerns over labor shortages and rising costs, which accelerated average selling price increases at the fastest pace in eight months.

The composite PMI, which merges manufacturing and service sector activity, increased to 50.8 in December from 50.1 in November.

Additionally, a quarterly Bank of Japan “tankan” survey indicated a slight improvement in sentiment among major manufacturers, while non-manufacturers remained optimistic about business conditions for the three months ending in December. Nonetheless, companies anticipate deteriorating business conditions in the upcoming three months due to weak global demand and potential higher tariffs under U.S. President-elect Donald Trump, which could cloud the economic outlook.