A business survey released on Thursday showed that Japan's manufacturing sector expanded at its weakest pace in six months in September, mainly due to slower growth in output and new orders.

The S&P Global Japan Manufacturing Purchasing Managers' Index (PMI) fell to 54.1 in September from 54.9 in August, in line with the preliminary reading.

Although the pace of growth slowed from the previous month, this marked the ninth consecutive month that the indicator has remained in expansion territory. A reading above 50.0 indicates expansion, while a reading below that level signals contraction.

Annabel Fiddes, Associate Director at S&P Global Market Intelligence, said: "Companies reported slower growth in output and new orders; some firms noted that clients are adjusting inventory levels as previously accumulated stockpiles begin to be drawn down."

Despite strong output growth, the pace slowed to a three-month low. The growth rate of total new orders also decelerated; following a multi-year high in August, the expansion was the weakest in four months.

Overseas demand remained solid. New export orders rose for the ninth consecutive month, with the pace of growth reaching its second-highest level since January 2018, mainly supported by stronger demand from Asian economies and improved sales to the United States.

Employment rose for the 22nd consecutive month, with the pace of job creation close to the recent high set in August and the second-fastest since April 2018.

The combination of rising staffing levels and slower sales growth pushed the increase in outstanding business down to a six-month low, with only a modest rise.

Although cost pressures eased somewhat, they remained elevated. Input cost inflation slowed to a six-month low, while companies continued to raise selling prices, with the increase among the highest since the second half of 2022.

Manufacturers remained optimistic about output growth over the next 12 months, with the confidence index little changed from August and above its long-term average. Companies cited demand from semiconductors and artificial intelligence (AI)-related technology sectors, though the survey also noted that supply disruptions, component shortages and rising costs pose potential risks.