- Japan’s manufacturing contracts in August due to U.S. tariffs, weak exports.
- Foreign orders drop at fastest rate in 17 months, per S&P PMI.
- U.S.-Japan trade deal lowers tariffs to 15%, but challenges
Japan’s manufacturing sector shrank for the second month in a row in August 2025. This decline was caused by weaker export demand because of U.S. tariffs, according to the S&P Global Purchasing Managers’ Index (PMI) survey. The PMI report showed a significant drop in foreign orders for Japanese goods, falling at the fastest rate in 17 months.
This highlights the risk faced by Japan’s economy, which relies heavily on exports. Official trade data indicated a 2.6% decline in exports year-on-year in July. This is the biggest drop since February 2021. Auto exports to the U.S. fell by 28.4% in value. However, the volume only dropped slightly by 3.2%, as manufacturers absorbed the tariff costs.
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A U.S. and Japan trade deal in July 2025 lowered tariffs on Japanese goods from 25% to 15%, providing some relief, but challenges remain. Annabel Fiddes, Economics Associate Director at S&P Global, pointed out that although manufacturing output showed a slight recovery after July’s decline, ongoing growth relies on better sales.
New orders kept falling, indicating weak demand both domestically and internationally. Input prices rose sharply in August, but selling prices increased at the slowest rate since October 2024. This put pressure on margins because of fierce market competition and customer discount requests.
Despite these pressures, the composite PMI, which includes manufacturing and services, increased to 51.9 in August from 51.6 in July. This rise was due to strong growth in the service sector. Some manufacturers showed cautious optimism about future business conditions, according to a Reuters poll. However, uncertainties surrounding U.S. tariffs still create concerns for Japan’s export-driven economy.