"Japan's economy is experiencing polar opposites! While the manufacturing industry continues to shrink, the service industry is defying the trend and growing."

A business survey released on Monday revealed the latest dynamics of the Japanese economy in December: manufacturing activity continued to contract, entering its sixth consecutive month of contraction, while the service sector maintained its growth momentum, further highlighting Japan's increasing dependence on the service industry. Although the initial value of the Japan Manufacturing Purchasing Managers' Index (PMI) published by Jibun Bank fell slightly from 49.0 in November to 49.5 in December, the decline narrowed. However, the index has been below the 50.0 threshold since June, indicating that manufacturing activity is in the contraction zone. Specifically, Usama Batt, an economist at S&P Global Market Intelligence, pointed out that the divergence in demand between the service and manufacturing sectors has intensified. The growth rate of new business in service companies reached its fastest pace in four months, while manufacturers faced a sharp decline in orders. Business confidence in the manufacturing sector has plummeted to its lowest level since May 2022, with input inflation accelerating to its highest point in four months and output prices soaring to a new high since July, highlighting the continued cost pressures faced by businesses. In contrast, the service sector presents a different picture. The Jibun Bank Services PMI preliminary value rose from 50.5 in November to 51.4 in December, reaching a four-month high. Despite the strengthening economic growth momentum, the challenges of labor shortages and rising costs have caused a slight decrease in business confidence. The rise in input costs has led to an eight-month high in average selling prices. Overall, the Japan composite PMI (covering both manufacturing and services) published by Jibun Bank for December was 50.8, up from 50.1 the previous month. In addition, the quarterly Tankan survey released by the Bank of Japan on Friday also showed a slight improvement in confidence among large manufacturers, while non-manufacturers remained optimistic about business conditions in the past three months (ending in December). However, soft global demand and the threat of higher tariffs proposed by U.S. President-elect Donald Trump have cast a shadow over business prospects for the next three months, with companies generally expecting business conditions to deteriorate.