Japan’s private sector ended 2025 on a firmer footing, with business activity continuing to expand despite softer momentum and persistent weakness in manufacturing, according to the latest flash PMI data from S&P Global.
The headline Flash Japan Composite PMI Output Index eased to 51.5 in December from 52.0 in November, remaining above the 50 threshold that separates expansion from contraction for a ninth consecutive month. While the pace of growth slowed from a three-month high, the reading still pointed to a modest expansion in overall activity at a rate stronger than the post-pandemic average.
At the sector level, services remained the primary driver of growth.
- The Services PMI Business Activity Index slipped to 52.5 from 53.2, signalling continued but slower expansion.
- Manufacturing conditions remained under pressure, though signs of stabilisation emerged. The Manufacturing PMI rose to 49.7 from 48.7, indicating contraction persisted but eased to its mildest pace in around 18 months.
New business returned to growth at the composite level following two months of decline, marking the strongest increase since August. Services demand improved modestly, while the downturn in manufacturing sales softened significantly, suggesting goods demand may be approaching a turning point. In contrast, new export orders declined again, reflecting continued weakness in overseas demand for manufactured goods, partially offset by marginal improvements in services exports.
Improving domestic demand conditions supported a stronger increase in employment. Overall staffing levels rose at the fastest pace since May 2024, with job creation accelerating across both manufacturing and services. Despite higher headcounts, outstanding business increased at the fastest rate in two-and-a-half years, driven largely by rising backlogs in the services sector, highlighting capacity constraints.
Business confidence remained positive but softened into year-end. Firms continued to expect output growth in 2026, though optimism fell from November, particularly among manufacturers. Survey respondents cited global economic uncertainty, demographic challenges and rising costs as key risks to the outlook.
Cost pressures intensified further, with input price inflation reaching its highest level in eight months across both sectors. Companies responded by lifting selling prices at solid rates, underscoring persistent inflationary pressures in Japan’s private sector.
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The PMI data reinforce the Bank of Japan’s cautious but increasingly hawkish policy bias. Services-led growth, accelerating employment and intensifying cost pressures support the case that underlying inflation dynamics remain firm enough to justify gradual policy normalisation. However, the continued contraction in manufacturing, weak export demand and softer business confidence argue against an aggressive tightening path. For the BOJ, the survey aligns with a strategy of incremental adjustment rather than abrupt moves, reinforcing expectations that any further policy steps will be carefully calibrated and data-dependent.
The BoJ meet on Thursday and Friday this week (18 and 19 December), a 25bp interest rate rise is widely expected.
For the yen, the PMI report offers a mixed signal. Rising domestic price pressures and stronger job growth are marginally supportive for JPY via the policy channel, but ongoing manufacturing weakness and subdued external demand limit upside. As a result, yen performance is likely to remain dominated by global rate differentials, particularly U.S. yields, rather than domestic activity data alone. Absent a clear shift in BOJ communication, PMI trends are unlikely to trigger a sustained JPY move, leaving the currency sensitive to swings in global risk sentiment and U.S
