Japanese business activity contracted for the first time in five months in March, according to preliminary purchasing managers index data released on Monday, as persistent local inflation and weak overseas manufacturing demand weighed.
The au Jibun Bank manufacturing PMI decreased to 48.3 in March, down from 49.0 in February, representing a contraction for the ninth straight month. The reading was also below the anticipated figure of 49.2. A PMI reading below 50 indicates a decline.
The decline in manufacturing was primarily caused by weaker international demand for products, impacting new orders. This occurred as markets worried about the economic effects of additional trade tariffs imposed by U.S. President Donald Trump.
Trump is scheduled to announce his plans for reciprocal trade tariffs on April 2. Japan's services sector contracted for the first time since mid-2024, as the au Jibun Bank services PMI dropped to 49.5 in March, down from 53.7 in the previous month.
The decrease in services activity was caused by a reduction in demand amid rising concerns about increasing costs, particularly as Japanese inflation stayed robust and exceeded the Bank of Japan’s target. In March, rising average input costs significantly impacted the demand for services due to higher inflation.
The decreases in manufacturing and services activities led to a drop in the overall composite PMI to 48.5 in March from 52.0 in February, marking its first decline in five months.
The PMI figures indicated a slight slowdown in the Japanese economy, particularly as consumer spending decreases from last year's peaks. Increasing domestic interest rates and persistent inflation have also impacted business activity, along with uncertainty regarding U.S. trade policies.