The improvement was driven primarily by the services sector, where activity accelerated sharply, but was also supported by the first increase in manufacturing output in seven months.
The Services PMI Business Activity Index climbed to 53.4 from 51.6, reflecting stronger demand conditions and the steepest expansion since mid-2025. Manufacturing also surprised to the upside, with the PMI rising to 51.5 from 50.0, above expectations and signalling a return to expansion. Manufacturing output moved back into growth territory at 51.2, ending a prolonged contraction and pointing to early signs of stabilisation in the industrial sector.
Demand indicators strengthened alongside activity. Composite new business rose at its fastest pace since May 2024, supported by a pickup in both domestic and overseas orders. Foreign demand increased for the first time since March last year, with services firms reporting stronger inbound demand and manufacturers recording their first rise in export orders in almost four years — a notable development for Japan’s externally exposed economy.
Rising workloads quickly translated into capacity pressures. Outstanding business volumes rose at the fastest pace since the composite series began in 2007, driven by solid backlogs growth in services and the first increase in manufacturing backlogs in more than three years. Firms responded by lifting hiring, with overall employment growth the strongest since April 2019 and gains recorded across both sectors.
Inflation signals remained firm. Although the pace of input cost inflation eased slightly from December’s recent peak, it remained historically elevated. Manufacturing firms faced renewed cost pressure, while services companies saw some moderation. Selling prices increased at the fastest pace in 20 months, highlighting persistent pricing power across the private sector.
Despite the strong start to the year, business confidence softened. Expectations for output over the next 12 months slipped to the lowest level since October, reflecting concerns around rising costs, labour shortages, demographic pressures and global economic uncertainty
