Japan's Manufacturing Contraction Slows in December Amid Improved Domestic Demand and Rising Costs

Recent data revealed a notable improvement in Japan's manufacturing sector during December, indicating a less severe contraction compared to the previous month, despite persistent pressures on exports and rising operational costs.

The S&P Global Manufacturing Purchasing Managers' Index rose to 49.7 in December 2025, up from 48.7 in November, exceeding market expectations and marking the highest reading since August. Although the index remains below the 50 mark that separates growth from contraction, the data reflects a gradual improvement in industrial activity.

Companies reported improved demand conditions, with the decline in goods demand slowing to its lowest pace in about 18 months, while new export orders continued to decline due to weak external demand for Japanese industrial products.

In terms of the labor market, the manufacturing sector recorded employment growth, supported by signs of overall demand improvement, alongside the slowest pace of unfinished work declines in a year and a half, indicating relative stability in activity levels.

Conversely, survey data indicated continued inflationary pressures, with input cost increases accelerating to their highest level in eight months, reflecting ongoing challenges related to raw material and energy prices.

Looking ahead, Japanese companies expressed cautious optimism regarding production prospects for 2026, bolstered by hopes for demand recovery, new product launches, and plans to expand into new markets, despite ongoing uncertainty in the global economic environment.