Japan's private sector commenced 2026 with robust momentum, as simultaneous demand recovery in both services and manufacturing propelled the composite PMI to its fastest growth rate in nearly three years.

According to the latest data released by S&P Global, the final reading for Japan's services Purchasing Managers' Index (PMI) in January surged to 53.7 from 51.6 the previous month, exceeding the preliminary figure of 53.4. This marks the highest level since February of last year and the tenth consecutive month the index has remained above the 50-point threshold that separates expansion from contraction.

Driven by the strong performance in services and a rebound in manufacturing output, the final composite PMI, which encompasses both sectors, climbed to 53.1. This represents the most rapid growth pace observed since May 2023, a period of 32 months.

Annabel Fiddes, Associate Director of Economics at S&P Global Market Intelligence, highlighted that the survey results indicate a broadening of Japan's economic recovery. She stated, "Demand conditions improved simultaneously in the manufacturing and service sectors for the first time in two and a half years."

Signals from the pricing and profitability front garnered significant market attention. The data revealed that while input cost pressures faced by firms eased to their lowest level in nearly two years, their ability to pass these costs onto customers strengthened. The rate of selling price inflation accelerated to a seven-month high, illustrating a trend of "falling costs and rising prices."

The details from January's data confirmed that the service sector continues to act as the primary engine of Japan's economic growth. The S&P Global report attributed this growth primarily to successful marketing campaigns and new client acquisition, which spurred the strongest increase in new business volumes in four months.

Among the sub-sectors, Finance & Insurance continued to lead the expansion, while growth in the Information & Communication sector was relatively moderate. Notably, external demand saw a significant revival, with overseas demand for Japanese services growing at the fastest rate since April of the previous year.

This surge in demand directly led to an increase in backlogs. The accumulation of unfinished business in January proceeded at the quickest pace since last September, compelling companies to continue expanding their workforce to manage capacity pressures. However, the rate of employment growth decelerated slightly compared to December.

The survey indicated a significant slowdown in the rate of increase for input prices in January, marking the slowest pace of growth in nearly two years. This suggests a marginal easing of the persistent pressures from raw material and operational costs that have long troubled businesses.

Nevertheless, companies did not halt their price-increasing efforts. Annabel Fiddes emphasized in the report, "Firms in Japan raised their charges at a steeper rate as they looked to boost their operating margins." The inflation rate for selling prices accelerated to a seven-month peak.

The improvement in Japan's composite PMI was also supported by a recovery in the manufacturing sector. Factory production witnessed its first growth since June of last year. Overall export business expanded for the first time since March of the previous year, and the extent of this expansion was the largest in over four years. This indicates that the Japanese economy is benefiting from a broad-based recovery in global demand.

However, businesses maintained a cautious stance regarding the outlook for the coming year. Data showed that overall business optimism had slipped to its lowest level since July of the previous year.

Annabel Fiddes pointed out that primary concerns among businesses are concentrated on structural issues such as "the global economic outlook, an aging population, and labor shortages."