A private survey released on Wednesday revealed that Japan's manufacturing activity expanded at a slower pace in March, as growth in output, orders, and manufacturer confidence moderated, while cost pressures reached a 19-month high due to conflicts in the Middle East.

The final reading of the S&P Global Japan Manufacturing Purchasing Managers' Index (PMI) for March fell to 51.6 from February's 45-month high of 53.0, though it was slightly above the preliminary reading of 51.4. A reading above 50.0 indicates expansion in the manufacturing sector, while a figure below 50.0 signals contraction.

Factory output and new orders increased for the third consecutive month, but the pace of growth slowed compared to February. The survey indicated that while the expansion in new overseas orders also moderated, demand from Asia, Europe, and the United States remained relatively resilient.

Upstream cost pressures intensified sharply, with input prices rising at the fastest pace since August 2024. The conflict in the Middle East drove up energy and raw material costs, while a weak yen and rising labor expenses further contributed to inflationary pressures. Output prices also increased at a faster rate than in February.

Employment growth slowed to a three-month low, although companies continued hiring to address labor shortages. Slower wage growth led to an increase in backlogs, which rose at the fastest pace since June 2022.

Manufacturers' business confidence retreated from February's 20-month high but remained generally optimistic, largely due to expectations of rising demand in artificial intelligence, semiconductors, and defense sectors. However, respondents also expressed caution due to the Middle East conflict.

Annabel Fiddes, Associate Director of Economics at S&P Global Market Intelligence, stated, "The conflict has also heightened uncertainty in the global economic outlook, dampening business confidence and leading to more cautious hiring and procurement activities. It will be crucial to closely monitor PMI data in the coming months to assess whether cost and supply chain pressures will continue to intensify."