Japan's private sector activity expanded at its fastest pace in five months in July, as a surge in manufacturing production offset a softening in services growth.

The headline seasonally adjusted S&P Global Flash Japan PMI Composite Output Index, which tracks business activity across both the manufacturing and services sectors, rose to 53.1 in July from 52.8 in June, according to a Friday press release.

"Growth momentum across Japan's private sector strengthened at the start of the second half of 2026," Usamah Bhatt, S&P Global Market Intelligence's economics associate director, said.

"Underlying data showed diverging sector trends, with a stronger expansion in manufacturing contrasting with softer growth in services."

While the broader manufacturing PMI incorporates various metrics like new orders and employment, the specific sub-index for manufacturing production recorded its steepest rise since February 2014.

The output growth occurred despite ongoing supply chain disruptions and higher prices linked to the conflict in the Middle East. Meanwhile, the flash services business activity index slipped from the previous month.

Export data reflected this sector split as overseas demand for goods expanded at its fastest rate in four months, while foreign demand for services declined.

As a result of strong demand, manufacturers accelerated hiring during the month, offsetting softer labor growth in the services sector.

However, overall optimism slipped in June due to uncertainty around the Middle East conflict.

"Optimism among services companies was particularly softer than in manufacturing, where firms hoped that improved demand across the key semiconductor and AI industries would continue to drive growth in the coming months," Bhatt said.