Japan's manufacturing activity expanded in December 2018 as output and new orders improved, but business optimism hit the lowest level since November 2016, data from IHS Markit and Nikkei showed.
The Nikkei manufacturing purchasing managers' index, or PMI, rose to 52.6 in December 2018 from 52.2 a month ago, signaling a moderate improvement in operating conditions.
Output increased on the back of new product launches and higher input needs, though international orders contracted. Stock shortages, capacity issues and higher raw material demand increased pressure on the supply chains, prolonging input delivery times, according to the report.
Meanwhile, business confidence fell for the seventh consecutive month to the lowest since November 2016, even as manufacturers remained upbeat on growth prospects, as concerns about the upcoming higher sales tax offset optimism about the 2020 Olympics. The rate of job creation improved only slightly in December 2018.
"With the sales tax increase set to come into play, fears over the durability of demand conditions are worrying," said Joe Hayes, economist at IHS Markit.