The Japanese economy’s momentum showed signs of weakening as 2025 drew to a close, with new data revealing a mixed picture of persistent manufacturing contraction offset by modest service sector growth, according to private-sector surveys released this week.
The closely watched S&P Global flash Japan Manufacturing Purchasing Managers’ Index climbed to 49.7 in December from 48.7 the previous month, marking the sixth consecutive month the sector has remained in contraction territory. While the reading represents an improvement, it stayed below the critical 50.0 threshold that separates growth from decline, underscoring the ongoing challenges facing Japanese factories.
“Growth remains centered on the service sector, as manufacturing production and sales weakened further,” said Annabel Fiddes, economics associate director at S&P Global Market Intelligence, in her analysis of the December figures.
The manufacturing sector’s troubles reflect broader headwinds buffeting Japan’s export-dependent economy. Factory output continued to decline in December, though at a slightly slower pace than in November. In a potential silver lining, demand for goods fell at its slowest rate in eighteen months, suggesting what Fiddes characterized as possible stabilization in the sector.
The service sector, which has been carrying much of Japan’s economic weight, also showed signs of losing momentum. The Flash Services PMI slipped to 52.5 in December from 53.2 in November, though it remained comfortably in expansion territory. The composite PMI, which combines both manufacturing and services activity, edged down to 51.5 from 52.0, reflecting the overall deceleration.
Despite the mixed economic signals, the survey contained some encouraging data points. Employment across the economy rose at its fastest pace since May 2024, while outstanding business—a measure of work backlogs—expanded at the quickest rate in two and a half years, suggesting underlying demand remains present in parts of the economy.
However, inflationary pressures continued to build. The rate of price increases accelerated to its fastest pace in eight months, with firms in both manufacturing and services raising their selling prices to consumers and clients, potentially squeezing household budgets and dampening future consumption.
Looking forward to 2026, business confidence remains resilient but has notably weakened from the previous month, particularly among manufacturers. Company executives cited a confluence of concerns, including uncertain global economic conditions, Japan’s demographic challenges from an aging population, and mounting cost pressures.
These concerns were echoed in a separate Bank of Japan quarterly survey released Monday, which painted a paradoxical picture of near-term strength and future anxiety. Big Japanese manufacturers reported business sentiment reached a four-year high in the three months through December. Yet these same firms expect conditions to deteriorate in the coming quarter, expressing particular worry about the potential impact of higher U.S. tariffs and sluggish domestic consumption.
The cautious outlook reflects Japan’s vulnerability to external shocks and policy changes, particularly any shifts in U.S. trade policy that could affect the country’s crucial export markets.
With manufacturing already under pressure and services growth decelerating, Japanese policymakers face the delicate challenge of supporting economic growth while managing inflation and navigating an increasingly uncertain global landscape as the new year begins.
WHAT YOU SHOULD KNOW
Japan’s economy is losing steam as 2025 ends, with manufacturing contracting for six straight months and services growth slowing. While employment is rising and some stabilization signs emerge, businesses are increasingly pessimistic about 2026 due to potential U.S. tariffs, rising costs, and weak consumer spending.
Japan faces mounting headwinds, with manufacturers particularly worried about what lies ahead, even as current sentiment remains relatively strong.
