Japan's factory activity growth hits near 3-1/2-year peak, PMI shows

TOKYO, Feb 2 (Reuters) - Japan's manufacturing activity grew at the fastest pace in about three and a half years in January, a private-sector survey showed, as strong customer demand drove an increase in output and new orders.

The S&P ?Global Japan Manufacturing Purchasing Managers' Index (PMI) rose to 51.5 in January from 50.0 in December, ?the strongest level since August 2022. The 50.0 threshold separates expansion ?from contraction.

"Japan's manufacturing industry propelled itself back into ?growth territory at ?the start of 2026, with firms signalling the strongest upturns in output and new ?orders for nearly four years," said ?Annabel Fiddes, an economics associate director at S&P Global Market Intelligence.

The headline improvement in the PMI was driven ?by gains in output, which expanded ?at the ?strongest pace since April 2022. Companies attributed the growth to a more favourable demand environment and the launch of new ?products. New orders also grew at the fastest rate since March 2022.

Notably, new export orders expanded for the first time since February 2022, buoyed by strong demand from key markets such as the U.S. and Taiwan.

Employment in the sector also saw a notable ?increase, reaching ?its highest level since September 2022 as firms increased their headcount to meet rising business requirements and expand capacity, ?the survey said.

However, inflationary pressures remain a concern. Input costs rose sharply, driven by higher labour and raw material costs, alongside a weaker yen.

As a result, output prices rose at their fastest rate in 19 months, which could impact customer demand and investment decisions.

Some firms expressed concerns over inflation and ?future demand strength, leading to a dip in business confidence to a three-month low.

Nonetheless, the overall outlook remained optimistic, with expectations of further production growth supported by ?global demand for semiconductors and automobiles.

(Reporting by Kaori KanekoEditing by Shri Navaratnam)