Japan's private sector business activity expanded in May, though at the slowest rate observed in the past five months, according to the latest S&P Global Flash PMI data.
The overall growth was driven exclusively by the manufacturing segment, as services activity showed no growth for the first time in over a year.
Stockpiling due to the ongoing Middle East conflict-which continues to disrupt supply chains and drive up prices-partly explained the sustained rise in manufacturing output.
At the composite level, average input costs climbed more sharply than at any point since October 2022, prompting businesses to raise their selling prices by the largest margin on record.
Business confidence regarding output over the coming year stayed low, largely because of persistent geopolitical uncertainties.
The seasonally adjusted S&P Global Flash Japan PMI Composite Output Index dropped from 52.2 in April to 51.1 in May, marking the 14th consecutive month of expansion but the weakest increase so far in 2026.
Meanwhile, the flash Japan Services PMI Business Activity Index slipped to 50.0 from 51.0 in April.
Total new business also rose at the slowest pace in five months, with modest gains in new orders across both manufacturing and services, while export business grew only slightly as stronger foreign demand for goods offset a sharp drop in overseas services sales.
Intense cost pressures persisted in May, with input costs rising at the fastest pace since late 2022 due to Middle East-driven supply disruptions and raw material shortages, hitting manufacturers harder than service providers.
In response, Japanese companies raised their selling prices again, resulting in the steepest rate of charge inflation in nearly 19 years of data collection, though the increase remained slower than that of input costs.
The flash Manufacturing PMI for Japan dipped to 54.5 in May from April's 55.1, while the Output Index within that sector also fell to 54.1 compared to the previous month's reading of 55.1.
Job growth slowed to a seven-month low and stayed modest, while backlogs rose slightly faster-particularly in manufacturing due to higher sales and supplier shortages.
Optimism edged up to a three-month high, though concerns over the Middle East conflict and its inflationary impact remained historically subdued.