Japan economic growth moderates amid shifting domestic demand

Japan’s private-sector activity expanded in September, though the pace of growth slowed due to moderating domestic demand and rising input costs. The S&P Global Composite PMI fell to 52.5 from 53.5 in August, marking its weakest expansion since May. While manufacturing output and new orders softened, resilient overseas demand—particularly in the semiconductor, automotive, and defense sectors—provided significant support.

Business sentiment among major manufacturers is expected to improve in the upcoming Bank of Japan Tankan quarterly survey. Forecasts from various think tanks suggest the headline diffusion index for large manufacturers could rise to plus 26. This optimism is largely driven by demand related to artificial intelligence and semiconductor manufacturing.

However, challenges remain. Higher energy and raw material prices, driven by Middle East tensions and a weak yen, continue to pressure businesses. Additionally, while manufacturing sentiment looks strong, non-manufacturer sentiment is expected to see a slight decline due to weak inbound demand and rising labor and fuel expenses.