In a notable reversal of trend, Japan’s manufacturing sector recorded its first expansion in 13 months during June 2025, buoyed by increased output and a cautiously optimistic business outlook. However, despite this encouraging sign, broader demand remains subdued, weighed down by persistent global trade uncertainties—particularly surrounding U.S. tariffs.
The final au Jibun Bank Manufacturing Purchasing Managers’ Index (PMI) climbed to 50.1 in June, up from 49.4 in May, just surpassing the crucial 50-point threshold that distinguishes growth from contraction. A corresponding flash PMI figure of 50.4 had signaled the initial gain, confirming the end of a year-long decline .
Key Drivers and Sector Performance
The uptick in June was largely driven by a boost in factory output, ending nine months of contraction. Additionally, Japanese manufacturers reported hiring for the seventh consecutive month—a reflection of growing confidence. Business sentiment also improved, reaching a five-month high, despite new orders slipping for the 25th month.
Stubborn Weakness in Demand
Despite the encouraging output figures, the sub-index for new business orders stayed under water. Notably, export orders have been contracting since February 2022, often blamed on uncertainty about future U.S. tariffs—especially in key industries like semiconductors and automobiles. Annabel Fiddes of S&P Global Market Intelligence commented that although manufacturers are hopeful, a sustained recovery hinges on clearer global trade conditions and firmer demand.
Rising Costs and Inflation Pressures
June also witnessed moderately higher costs of raw materials, labor, and energy. Input and output price sub-indexes rose from May, echoing inflationary pressures in the broader economy. Nevertheless, input cost inflation was the slowest in 15 months, while output price inflation accelerated to its strongest pace in four months.
Broader Economic Context
The manufacturing rebound coincided with gains in the services sector, which saw its flash PMI reach 51.5—a four-month high—fueled by strong domestic demand. This pushed the composite PMI(which combines both manufacturing and services outputs) to 51.4, its highest level since February.
Meanwhile, on the international stage, fears of U.S. tariff escalations loom large. Japan has applied for exemptions from proposed 25% tariffs on the auto industry, a vital pillar of its export economy. The flash PMI results reflect this tension—the partial recovery in factories is overshadowed by an unstable global trade environment.
Employment Trends
Despite the headwinds, employment remained a bright spot. Firms across both manufacturing and services sectors added workers at the fastest pace in nearly a year. This suggests that many companies are preparing for improved demand, even as revenue growth remains muted.
Outlook and Implications
Japan’s June PMI signals a modest but meaningful rebound in industrial activity. The uptick in output and sustained job gains symbolize a fragile yet hopeful shift. That said, with new orders—and particularly export demand—stuck in negative territory, the road to a robust recovery remains precarious.
The trajectory of global trade policies will be instrumental in shaping future performance. Any resolution to U.S. tariff disputes, especially regarding autos and semiconductors, could sharply improve business sentiment and order flows. On the domestic front, consumer recovery and corporate investment will also be critical.
For now, Japan finds itself in a “cautiously optimistic” phase: production is bubbling up, but broader momentum remains tentative. A durable turnaround will require both global policy stability and revived customer demand—something that could take months to crystallize.
