Japan's Factory Activity Contracts Sharply in September, PMI Shows

Manufacturing Sector Faces Steepest Contraction in Six Months

Japan's manufacturing sector activity contracted at its sharpest pace in six months during September 2025, according to the latest private sector survey. The S&P Global flash Japan Manufacturing Purchasing Managers' Index (PMI) dropped to 48.4 in September from 49.7 in August, falling further below the critical 50.0 threshold that separates growth from contraction. This marks the lowest reading since March and signifies the 14th contraction in factory activity over the past 15 months.

Declining New Orders and Output Drive Downturn

The significant downturn was primarily driven by a substantial decline in new orders, which fell at the fastest pace since April. Companies attributed this reduction to cautious inventory policies among clients amidst challenging market conditions. Consequently, the manufacturing output index also recorded its lowest level in six months. While the decline in new export orders eased slightly from August's 17-month low, some manufacturers pointed to the ongoing impact of US tariffs and a stagnating economy as contributing factors to reduced demand.

Cost Pressures Ease, Employment Weakens

On the price front, input cost inflation for manufacturers continued to moderate, reaching levels not seen since early 2021, or the second-lowest level in over four-and-a-half years. This was attributed to easing prices for raw materials, labor, utilities, and transportation. However, output price inflation accelerated from August. In terms of employment, manufacturing jobs shrank in September for the first time since November last year, with the overall pace of job creation across the private sector reaching its weakest in two years.

Services Sector Provides Counterbalance Amidst Overall Slowdown

In contrast to the struggling manufacturing sector, Japan's services sector continued to show resilience. The Services PMI registered 53.0 in September, a slight decrease from 53.1 in August, but maintaining its expansionary streak for the sixth consecutive month. Annabel Fiddes, economics associate director at S&P Global Market Intelligence, noted that the service sector remains a 'key growth engine,' with its solid increase in activity helping to offset the deepening reduction in manufacturing production. Despite the services sector's strength, the overall Composite PMI, which combines both manufacturing and services, decreased to 51.1 in September from August's 52.0, indicating the slowest growth in overall business activity since May.