Manufacturing activity across Japan posted the fastest increase seen in several years during January, buoyed by an uptick in output; however, the sector faces considerable uncertainties due to Omicron, rising input costs and a global chip shortage. The au Jibun Bank Flash Japan Manufacturing PMI picked up to a seasonally adjusted 54.6 in January from December’s final reading of 54.3.

Output prices surged at the fastest pace seen since July 2008, helping the overall PMI reading rise. In addition, manufacturers reported a rebound in output and new orders after experiencing a slight dip during the month of December.

However, Japan is also reeling under a fresh wave of COVID-19 infections due to the Omicron variant as most other parts of the world, which has caused the services sector activity to contract. The au Jibun Bank Flash Services PMI dipped to a seasonally adjusted 46.6 in January from a final 52.1 in December, falling under the 50-threshold indicating contraction.

Employment across Japan’s services sector contracted at the fastest pace since May 2020, a worrying sign for the health of the sector as well as the overall economy. While firms remain optimistic about an improvement in business conditions over the coming year, the level of optimism has fallen to the lowest levels seen in one year.

According to Economist at IHS Markit, Usamah Bhatti, “Private sector firms reported that the surge in COVID-19 cases from the more transmissible Omicron variant had hindered client confidence, most notably in customer-facing industries across the service sector as restrictions were re-introduced across various prefectures including the capital Tokyo.”