Japan PMI Hits 53.1 as AI Demand Lifts Manufacturing Output

Japan's private sector grew at its fastest pace since February, with the S&P Global Flash Composite PMI Output Index rising to 53.1 in July from 52.8. The reading marked a sixteenth consecutive month of expansion. Manufacturing output accelerated sharply, with the Output Index climbing from 54.3 to 56.1, even as the headline Manufacturing PMI edged down to 54.7 from 54.8. Services activity cooled modestly, with the Services PMI Business Activity Index slipping to 51.9 from 52.2.

Manufacturing continued to outperform services, supported by demand from the semiconductor and artificial intelligence industries. Manufacturers also built inventories of finished goods and raw materials to guard against supply chain disruptions and higher input costs linked to the Middle East conflict. Overall cost inflation eased slightly from June.

The outlook turned more cautious. Firms passed higher costs on to customers, with services companies reporting faster increases in selling prices as they sought to protect margins. Business confidence weakened, particularly in the services sector, reflecting uncertainty over the economic outlook and geopolitical risks.

The data reinforces the case for the Bank of Japan to maintain its tightening path, with a rate decision due this week. Markets will watch for any shift in the BOJ's language on the pace of normalization.