Japan’s manufacturing industry has delivered an impressive report card at the start of 2026, driven by the twin effects of increasing global demand and the depreciation of the Japanese yen. According to the latest data from S&P Global on February 2, manufacturing activity in Japan in January recorded its fastest growth in nearly three and a half years, showcasing robust customer demand that has fueled an increase in production and new orders.
S&P Global reported that Japan’s Purchasing Managers’ Index (PMI) rose to 51.5 in January, surpassing the 50.0 recorded in December last year. This not only places Japan comfortably above the expansion/contraction threshold (a critical indicator of whether economic activity is increasing or decreasing) but also marks the highest level since August 2022.
Annabel Fiddes, Deputy Chief Market Intelligence Officer at S&P Global, highlighted that “Japan’s manufacturing sector has returned to a growth trajectory at the beginning of 2026, with enterprises expressing the strongest momentum in production capacity and new order growth in nearly four years.”
Benefiting from strong demand in key markets such as the United States and Taiwan, new export orders showed expansion for the first time since February 2022. Many companies have expanded their hiring efforts to meet this surge in business demand, leading to an increase in employment index to its highest level since September 2022.
The revival of the real economy is also reflected in the capital markets. According to the latest “Japan Dashboard” released by S&P Dow Jones Indices on January 30, the momentum of the 25.12% surge in the S&P Japan 500 Index in 2025 is expected to continue into 2026.
Data shows that in January, the S&P Japan 500 Index rose by 4.59%, marking the 11th consecutive month of gains, with projections indicating further increases of 8.03% in March and 31.25% in December.
In terms of sector performance, the market structure exhibits distinct characteristics of “inflation and rate hike benefits”. The “Energy” sector has been boosted by the strength in commodity prices, with a monthly increase of 13.88%, leading the market. The “Financials” sector, driven by expectations of rate hikes, rose by 9.37% in the month, indicating investors are actively positioning themselves for the opportunities presented by the normalization of yield curves.
However, behind the economic heat lie costs. The PMI survey indicates that rising labor costs, increasing raw material prices, and the weakness of the Japanese yen have significantly increased input costs for businesses, with output prices reaching a 19-month high.
This aligns with revelations from the Bank of Japan’s (BOJ) minutes of the December meeting. The minutes indicate that despite the central bank raising the policy rate to 0.75%, a 30-year high, all nine members agreed that wages and prices are gradually rising, and the current real interest rate remains significantly negative, signaling continued accommodative financial conditions.
Data shows that as of December 2025, Japan’s core Consumer Price Index (CPI) was at 2.1%, exceeding the BOJ’s 2% target for the fourth consecutive year. Facing imported inflationary pressures due to the depreciation of the Japanese yen and wage costs driven by labor shortages, market expectations for the BOJ to accelerate rate hikes are on the rise.
Although most analysts initially predicted that the central bank might wait until September to take action, current pricing in the Swap Market indicates that traders are now placing an 80% probability on the BOJ further raising rates to 1.0% in April.
These developments may impact customer demand and investment decisions, with some companies expressing concerns about inflation and future demand strength, leading to a drop in business confidence to its lowest point in three months. However, experts still believe that Japan, supported by global demand for the semiconductor and automotive industries, holds an optimistic overall outlook.