53.1, Japan's Composite PMI hits a 32-month high

Japan's private sector started strong in 2026, with a simultaneous recovery in demand for both services and manufacturing, driving the composite PMI to its fastest growth rate in nearly three years. According to the latest data released by S&P Global, the final value of Japan's services Purchasing Managers' Index (PMI) rose from 51.6 last month to 53.7 in January, exceeding the preliminary value of 53.4, and reaching its highest level since February of last year, remaining above the 50 mark for the tenth consecutive month. At the same time, driven by the strong performance of the services sector and the rebound in manufacturing output, the final value of the composite PMI, which includes both sectors, rose to 53.1, marking the fastest growth rate in 32 months since May 2023. Annabel Fiddes, Associate Director of Economics at S&P Global Market Intelligence, pointed out that the survey results indicate that the recovery of the Japanese economy has become more widespread. She stated, “The demand situation has improved in both manufacturing and services for the first time in two and a half years.” The market is particularly focused on signals from prices and profits. Data indicates that although the pressure of input costs faced by companies has eased to the lowest level in nearly two years, their ability to pass on costs to customers has strengthened, with the sales price inflation rate accelerating to a seven-month high, showing a trend of “costs down, prices up.” Service Sector Recovery: Finance and Insurance Lead Growth Details from January's data show that the services sector continues to be the main engine of Japan's economic growth. The S&P Global report noted that this growth is mainly attributed to successful marketing activities and the acquisition of new customers, driving the strongest growth in new business volumes in four months. From a sectoral perspective, the finance and insurance sector continues to lead growth, while the information and communication sector's growth is relatively moderate. Notably, external demand has significantly rebounded, with Japan's services sector experiencing the fastest growth in overseas demand since April of last year. This increase in demand has directly led to an accumulation of backlogs. The accumulation rate of unfinished business in January was the fastest since September of last year, forcing companies to continue expanding their workforce to cope with capacity pressures. However, the pace of employment growth has slightly slowed compared to December. Cost Pressure Eases While Companies Raise Prices The survey shows that the rate of increase in input prices significantly slowed in January, marking the slowest growth in nearly two years. This indicates that the raw material and operational cost pressures that have troubled companies for a long time are marginally easing. However, companies have not stopped their price hikes. Annabel Fiddes emphasized in the report: “The fees charged by Japanese companies are rising at a steeper rate as they seek to improve their operating profit margins.” The sales price inflation rate accelerated to a seven-month high Exports Reach Four-Year High, but Optimism About Future Prospects Declines The improvement in Japan's composite PMI data is also attributed to the recovery in manufacturing. Factory production in January saw its first increase since June of last year. Overall export activity expanded for the first time since March of last year, with the largest growth in over four years. This indicates that the Japanese economy is benefiting from a broad rebound in global demand. However, businesses remain cautious about their outlook for the coming year. Data shows that overall business optimism has fallen to its lowest point since July of last year. Annabel Fiddes pointed out that the main concerns for businesses are centered around "structural issues such as the global economic outlook, aging population, and labor shortages."