Growth in Japan's manufacturing sector slowed slightly in May, although output continued to rise as companies built up inventories to shield against global supply chain disruptions caused by the Middle East conflict.
The headline S&P Global Japan Manufacturing Purchasing Managers' Index (PMI) slipped to 54.5 in May from 55.1 in April.
However, the sector remained in expansion territory, staying well above the neutral 50-point threshold, according to S&P Global's press release on Monday.
"Delving into the details of the survey showed that the current period of expansion is being partly driven by stock building among manufacturers and their clients, as companies looked to safeguard against product shortages and mitigate price risks driven by the war in the Middle East," Annabel Fiddes, S&P Global Market Intelligence's economics associate director, said.
The survey noted increased demand for semiconductors and oil-based products. This aligns with official Ministry of Finance data, which showed that April chip exports surged 41.6% year over year to 776.1 billion yen, helping drive total exports up 14.8% to 10.51 trillion yen.
Despite the stronger global demand, however, the growth rate of total new orders softened, the ratings firm noted.
To prepare for potential shortages and supplier price hikes, manufacturers increased their purchasing activity to a four-year high in May, survey data showed. Firms also expanded their workforces to meet production needs.
Recent government data showed Japan's unemployment rate dropping to 2.5% in April, the lowest since July 2025, from 2.7% in March. The number of unemployed individuals fell to 1.8 million, while seasonally adjusted employment rose to 68.8 million from 68.2 million the previous month.
On the inflation front, average input costs, particularly for metals and oil-based products, climbed to their highest level since September 2022, S&P Global said.
While business sentiment edged higher in May compared with April, it remained below its historical average.
"Although manufacturers generally anticipate reaping further gains from strong growth in areas such as AI and electronics, surging costs and subdued global economic conditions could act as headwinds in the months ahead," Fiddes added.