Japan's manufacturing growth slows as companies stock up proactively to hedge against Middle East price risks

(1) Japan's Manufacturing Purchasing Managers' Index (PMI) final reading for May was 54.5, below April's four-year high of 55.1. The pace of expansion has slightly slowed, but the index has remained above the 50 threshold for growth. (2) Factory output increased for the fifth consecutive month, though at a slower pace; the growth rate of new orders also slowed, while the growth rate of new export business was the fastest since May 2021, thanks to improved demand from the United States and other parts of Asia. Part of the growth was driven by manufacturers and customers stockpiling inventories to guard against product shortages and mitigate price risks from the Middle East conflict. (3) Due to rising raw material prices caused by the situation in Iran, input cost inflation reached its fastest pace since September 2022, and the sales price index was the highest since October 2022. Business confidence for the next year has improved compared with April.