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

Japan’s private sector had a strong start in 2026, with a simultaneous recovery in demand for both the services and manufacturing sectors, driving the composite PMI to its fastest growth in nearly three years.

According to the latest data released by S&P Global, the final value of Japan’s services PMI in January jumped from 51.6 in the previous month to 53.7, above the preliminary value of 53.4. This marked the highest level since February last year and remained above the 50-point threshold separating expansion from contraction for the tenth consecutive month.

Meanwhile, driven by the strong performance of the services sector and the rebound in manufacturing output, the final composite PMI — encompassing both sectors — rose to 53.1, the fastest growth in 32 months (since May 2023).

Annabel Fiddes, Associate Director of Economics at S&P Global Market Intelligence, pointed out that survey results show Japan’s economic recovery has become more broad-based. She stated, “Demand conditions have improved simultaneously in both manufacturing and services sectors, marking the first occurrence in two and a half years.”

The market is paying close attention to signals regarding prices and profits. Data indicates that although input cost pressures faced by businesses have eased to their lowest levels in nearly two years, companies’ ability to pass on costs to clients has strengthened, with selling price inflation accelerating to a seven-month high, showing a trend of “lower costs, higher selling prices.”

Services Sector Recovery: Finance and Insurance Lead Growth

January data details show that the services sector continues to act as the main driver of Japan’s economic growth. S&P Global’s report noted that this growth was mainly fueled by successful marketing campaigns and new customer acquisition, driving new business volumes to the strongest growth in four months.

From a sub-sector perspective, finance and insurance continue to lead growth, while the expansion in information and communications has been relatively moderate. Notably, external demand has recovered significantly, with overseas demand growth in Japan’s services sector reaching its fastest pace since last April.

This increase in demand has led directly to a rise in backlogged work. Unfinished business accumulated at the fastest rate since last September in January, forcing companies to continue expanding their workforce to cope with capacity pressures. However, the rate of employment growth was slightly slower than in December.

Cost Pressure Relief and Continued Price Hikes

Surveys show that the pace of input price increases slowed significantly in January, hitting the lowest rate in nearly two years. This indicates that the longstanding pressure of raw material and operating costs on businesses is gradually easing.

Nevertheless, companies have not stopped raising prices. Annabel Fiddes emphasized in the report: “Fees charged by Japanese companies rose at a steeper pace, as companies aim to improve their operating profit margins.” Selling price inflation accelerated to a seven-month high.

Exports Hit Four-Year High, but Optimism Declines

The improvement in Japan’s composite PMI was also aided by a recovery in manufacturing. Factory output saw its first increase since June of last year in January. Overall export business expanded for the first time since March last year, and the pace of expansion was the fastest in over four years. This shows Japan’s economy is benefiting from a broad global demand recovery.

However, companies remain cautious about the outlook for the coming year. Data indicates that overall business optimism has dropped to its lowest level since July last year.

Annabel Fiddes pointed out that major concerns among companies are focused on “the global economic outlook, population aging, and labor shortages” as structural issues.

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