TOKYO (Reuters) - Japan's factory activity expanded for the first time in a year in May, a private-sector survey showed on Monday, but overall growth was modest and demand was still subdued while a weak yen raised the cost of imported items for some producers.
The final au Jibun Bank Japan manufacturing purchasing managers' index (PMI) rose to 50.4 last month from 49.6 in April, having last climbed above the 50.0 threshold - which separates growth from contraction in activity - in May 2023.
The index was little changed from 50.5 reported in the flash PMI.
The key output and new orders subindexes remained in contraction but both improved close to the no change level and fell at their slowest pace in a year, suggesting that conditions are starting to look up.
Manufacturers also stayed upbeat about the outlook reflecting expectations that marketing efforts and new product launches would be successful. They also hoped for a recovery in the automobile and semiconductor sectors.
The results showed "encouraging trends across the manufacturing industry, with new orders and output broadly stable and businesses remaining optimistic about the year ahead," said Pollyanna De Lima at S&P Global Market Intelligence.
Factory employment expanded albeit at a slower pace, which De Lima attributed to retirements as well as difficulties in finding suitable replacements.
"Another challenge faced by goods producers was an intensification of cost pressures, as yen depreciation added strain on imported item prices."
Input price pressures were at their worst in over a year, with firms saying costs of labour, material and transportation had risen from April largely due to the yen's weakness.
The inflation strains prompted manufacturers to raise their selling prices at the fastest pace in a year last month. Output prices have expanded since December 2020.
The yen's weakness and its impact on imported prices as well as domestic consumption have become a policy headache for the Bank of Japan as it looks to hike interest rates again after ending negative rates in a landmark decision in March.
A separate monthly survey by Reuters showed that Japanese business confidence held steady in May, but manufacturers and service-sector firms complained that inflationary pressures driven by the weak yen were squeezing profit margins.
De Lima said the combination of rising wage costs and the increase in firms' selling prices was "an undesirable outcome considering that domestic and external demand remain subdued."