Japan’s manufacturing sector posted its best result in 45 months in February. According to S&P Global, the manufacturing PMI jumped to 53.0 from 51.5 in January, marking the highest reading since May 2022. The key drivers were a sharp rise in output and a surge in new orders, the pace of which was the strongest in four years.

Japanese manufacturers owe their most powerful increase in overseas orders since June 2021 to high demand from Europe and Asia. Against this backdrop, firms have been ramping up hiring: employment in the sector rose for the 15th consecutive month, with hiring standing at a four-year high. However, the positive momentum is uneven: producers of investment and intermediate goods are enjoying a boom, while the consumer goods sector remains stagnant.

The pickup in activity has forced businesses to increase commodity purchases, but supply chains are struggling to cope. Suppliers report labour shortages and component shortfalls, which are prolonging delivery deadlines. Cost pressures persist: commodity and transport prices are rising, driven in part by the weak yen, although input cost inflation has eased somewhat from the January peak.

Business sentiment in Tokyo has rebounded to its strongest level since mid-2024. Industrial giants pin their hopes for further growth on a recovery in global demand and on expected policies from Sanae Takaichi’s administration. Despite confidence about the outlook, companies remain cautious, opting to trim inventories of finished goods amid unstable supplies.