Japan's economy contracts in key sectors
Japan's economic outlook has darkened following new data showing contractions in both manufacturing and service sectors in March. The au Jibun Bank's Manufacturing Purchasing Managers' Index fell to 48.3 from 49.0 in February, marking the fastest decline in factory activity in a year and remaining below the crucial 50-point threshold that separates growth from contraction.
The manufacturing downturn was characterized by decreases in production and new orders, with businesses citing multiple concerns including rising costs, labor shortages, and uncertainty over growing global trade tensions. Despite these challenges, manufacturing firms increased employment for the fourth consecutive month.
Perhaps more troubling is the simultaneous contraction in Japan's service sector, previously a bright spot in the economy. The services business activity index plummeted to 49.5 from February's robust 53.7, indicating the first contraction in five months. The composite PMI, combining both sectors, dropped to 48.5, suggesting an overall economic contraction.
Inflationary pressures remain elevated, with both input costs and selling prices continuing their upward trend. Recent data revealed that consumers are struggling with soaring prices for essential goods, with rice costs surging more than 80% year-on-year.
Business sentiment among Japanese manufacturers has turned pessimistic for the first time in three months, influenced by uncertainties surrounding U.S. tariff policies and China's economic slowdown. The Bank of Japan now attributes weak economic performance primarily to chronic labor shortages rather than stagnant demand, suggesting that supply constraints exacerbated by an aging population are limiting growth.
Analysts believe these mounting inflationary pressures increase the likelihood of additional interest rate hikes by the Bank of Japan in coming months, as policymakers face the complex challenge of stimulating demand while addressing structural labor market issues to revitalize economic momentum.
