Japan Factory Activity Slows as PMI Hits 53.3, Lowest in Seven Months

According to the survey, Japan's factory sector is still expanding solidly, but price pressures are building again, reinforcing the Bank of Japan's argument for continued policy tightening. Stronger input inflation, partly due to oil, along with hiring near its fastest pace in years and rising backlogs, indicates a tight goods sector rather than a weakening one. For the yen, the data are mildly supportive if they strengthen expectations of tighter policy. Demand from semiconductors remains the main growth engine, leaving Japanese chip and equipment stocks vulnerable to any change in the AI investment cycle. Higher energy costs from the Middle East conflict pose an upside risk to Japan's goods inflation.

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Japan's factories are still growing at a healthy pace thanks to AI-related chip demand, though expansion is slowing and costs are rising.

Summary:

• The S&P Global Japan Manufacturing PMI dropped to 53.3 in October from 54.1, a seven-month low but still significantly above the long-run average of 50.6
• New orders and output continued to increase, helped by semiconductor demand, but at the weakest rates since March; export orders also grew more slowly
• Employment growth remained close to its fastest pace in eight and a half years, and work backlogs increased at a faster rate
• Input price inflation accelerated for the first time in five months due to higher oil, raw material and component costs, while output price inflation eased to a six-month low
• Companies built up input inventories at the fastest pace in nearly four years to protect against further price increases, and optimism reached an eight-month high

Japan's manufacturing sector continued to grow in October, but at a slower pace, with output and new orders expanding at their weakest rates in seven months and cost pressures starting to rise again, based on S&P Global survey data released at 0030 GMT on Monday (1930 US Eastern on Sunday).

The S&P Global Japan Manufacturing PMI fell from 54.1 in September to 53.3. That was the lowest reading in seven months, but it remained far above the series' long-run average of 50.6, still indicating a solid improvement in business conditions.

New orders have increased every month this year, and companies reported stronger demand in October, especially from semiconductors and related markets. Export orders also rose. However, growth in both total and overseas orders was the slowest since March. Output rose for a tenth consecutive month, also at its weakest pace since the end of the first quarter, and purchasing activity grew at its slowest rate in six months.

The labour market stayed strong. Job creation held steady near its fastest pace in eight and a half years, while backlogs of work increased at a faster rate, indicating some capacity strain. Business confidence also improved, with optimism about future output reaching an eight-month high.

Prices were the main worry. Input cost inflation picked up for the first time in five months, which firms attributed to higher prices for oil, raw materials and components. Cost pressures remained elevated by historical standards but below the highs reached in the second quarter. Factory gate prices continued to rise at a rate well above the series average, though that pace slowed to a six-month low.

Concerns about further cost increases led some manufacturers to build up input stocks. Combined with efforts to meet production needs, this resulted in the steepest rise in pre-production inventories in almost four years.

An economist at S&P Global Market Intelligence noted that growth had lost some momentum compared to earlier in the year but remained decent by historical standards, with AI-related demand and growing order books supporting confidence. The economist added that manufacturers continue to show strong pricing power as backlogs grow.

The combination of steady hiring, firm pricing and renewed cost pressure suggests Japan's goods sector remains tight despite slower growth, a backdrop that will interest policymakers watching for signs of persistent inflation.