Japan's manufacturing sector continued to expand in September, though the pace of growth slowed. The S&P Global Japan Manufacturing PMI fell to 54.1 from 54.9 in August, marking the lowest level in six months. The survey was conducted between September 8 and 24.

The data showed that manufacturing output and new orders were still growing, but both at slower rates than in August, indicating that domestic production and demand momentum had cooled somewhat.

New orders and output growth slow

In September, manufacturing output growth eased to a three-month low, with some firms reporting weaker-than-expected sales performance. Although new orders remained strong, they also retreated from the multi-year high recorded in August, with the growth rate dropping to the lowest since May. Some companies noted that customers were gradually working through previously accumulated inventories, which led to a slower pace of purchasing and new order intake. This suggests that the September slowdown in manufacturing was more a normal cooling after prior high growth rather than a sudden weakening of demand.

Export orders remain strong

Compared with domestic orders, export demand performed notably better. In September, new export orders for Japanese manufacturing continued to grow substantially, with the pace remaining close to the eight-and-a-half-year high set in August. The main drivers came from increased demand in Asian economies and the United States. This indicates that despite the overall PMI pullback, external demand remains an important support for Japan's manufacturing sector, particularly against the backdrop of strong demand for semiconductors and AI-related technologies.

Firms continue hiring, backlog pressure eases

On the employment front, Japanese manufacturers continued to add staff, with the rate of job creation close to the multi-year high set in August. The hiring was mainly driven by the need to handle relatively high new orders and expand capacity. As employment increased, although outstanding business continued to rise, the growth rate fell to a six-month low, suggesting that firms' ability to work through orders had improved.

Cost pressures remain high but ease somewhat

In September, input costs for manufacturers continued to rise rapidly, though the rate of inflation fell to a six-month low. Firms widely cited rising costs for labor, raw materials, energy, and transportation, with some attributing the increase to the Middle East war and the weak yen. Despite the moderation in input cost growth, companies still raised selling prices at a relatively fast pace, with the rate of increase among the higher levels since late 2022. This means that Japan's manufacturing sector still retains some ability to pass on costs.

Supply chain pressures pick up again

Supplier delivery times continued to lengthen, with the degree of deterioration in supplier performance close to the most severe in four years. Firms widely reported product shortages upstream, especially tight supply of electronic components and AI-related technology products. This echoes the current strong demand for AI and semiconductors: robust demand not only supports orders but also reintroduces supply pressure on some key components.

Firms remain optimistic about the future

Despite the slowdown in manufacturing growth in September, Japanese firms remained confident about their output prospects for the next 12 months. The main reasons include still-strong demand from overseas customers and continued resilience in semiconductor and AI-related technology demand. Therefore, the signal from Japan's September manufacturing data is not a "reversal in sentiment," but rather that expansion is still ongoing, just cooling from its previous high-growth phase; at the same time, exports, employment, and AI and semiconductor demand continue to provide important support for the manufacturing sector.