- Driven by strong demand related to semiconductors and artificial intelligence, Japan's manufacturing output and order growth in July reached a nearly twelve-and-a-half-year high since February 2014, indicating that the recovery of the tech supply chain is providing solid support to Japan's real economy.
- The S&P Global Japan Manufacturing Purchasing Managers' Index for July recorded 54.5, slightly down from 54.8 in June, but it has remained in the expansion zone for seven consecutive months, with external demand growth from Asia and the United States reaching the fastest pace in over five years.
- Geopolitical risks triggered by the Middle East situation have led to a continuous rise in procurement costs for oil and raw materials. Inflationary pressures and supply chain delivery delays persist, prompting manufacturing companies to accelerate their stocking pace and increase procurement inventories.
Technology Demand Drives Output Expansion
The S&P Global Japan Manufacturing PMI for July recorded 54.5. Although the index slightly declined from the previous month, both output indicators and order growth climbed to their highest points since February 2014. Strong orders for products related to semiconductor and artificial intelligence development are the core drivers of this growth, reflecting that the global AI capital expenditure wave is rapidly transmitting through the upstream and downstream supply chains to Japan's high-end manufacturing sector, boosting market earnings expectations for Nikkei 225 index (NKY:IND) related tech-weighted stocks.
Reviving External Demand and Supply Chain Challenges
Driven by new business from Asia and the United States, Japan's manufacturing export order growth reached a new high in over five years, indicating solid demand for equipment manufacturing in overseas core markets. However, supply chain disruptions caused by Middle East conflicts continue, forcing some companies to adopt pre-stocking strategies to avoid supply interruptions, leading to a significant acceleration in raw material procurement activities, with procurement inventories growing at the fastest pace since May 2024. This suggests that although companies face logistical uncertainties, they remain optimistic about their end-delivery capabilities.
Cost Inflation Boosts Rate Hike Expectations
Geopolitical situations have driven up oil and commodity prices, resulting in a significant increase in input costs and output prices for manufacturing companies in July. Inflationary pressures continue to rise, reinforcing market expectations for further normalization of monetary policy by the Bank of Japan (BOJ). If price transmission is smooth and wage growth continues, macro funds may reassess the attractiveness of yen (JPY:CUR) assets, thereby boosting Japanese government bond yields and reshaping capital flows.
Business Confidence Rises to Four-Month High
Boosted by the long-term prospects of the semiconductor industry, business confidence among Japanese manufacturing companies rose to a four-month high in July, with strong hiring and investment intentions. Supported by robust capital expenditure and order backlogs, overall market risk appetite has improved, and the trend of capital flowing into quality industrial and tech sectors has become more pronounced. If global chip demand continues to exceed expectations, Japan's manufacturing expansion cycle is likely to extend further.
