AI just sent Japan’s factories back to 2018-level order growth

Japan’s S&P Global Flash Manufacturing PMI rose to 55.1 in August, up from 54.5 the previous month. New orders surged at their fastest rate since January 2018. This growth was driven by major international AI clients, including foundries, chipmakers, and data center operators.

For producers of components and equipment in Japan, the report suggests that investment in AI is continuing to promote industrial activity in the country.

Where are the orders coming from

The July regional survey of the Bank of Japan, released on the 9th, provides a clearer understanding of what is pushing the demand. According to branch managers, orders for equipment used in semiconductor production and electronic components have increased with the ongoing growth of global AI investment. At the same time, demand starts to move into other sectors such as equipment for electrical power generation, communications equipment, and industrial molds.

Hard production data confirms the trend. According to a revision by the Ministry of Economy, Trade and Industry issued on August 17, Japan’s industrial production index improved to 104.6 in June, seasonally adjusted data reflecting an increase of 1.9% compared to May and 4.9% year-on-year. The factory’s operating ratio, which is an indicator of how much factory work went up by 4.1% since the previous month.

The export side of the same story

The recent trade data from Japan provides a similar outlook. Exports grew by 23.2% year-on-year in July to an unprecedented ¥11.5 trillion, exceeding projections of a 19.9% increase and growing faster than a 19.3% rise in June, according to a Reuters report. The rise was bolstered by demand related to artificial intelligence data centers, while a weak yen contributed to Japanese goods being more competitive in global markets.

Shipments to the U.S. increased by 22%, and exports to China increased by 25.8%. On the other hand, imports grew by 27.8% to a historically high figure of ¥12.1 trillion, mainly due to rising oil prices, thereby leaving Japan with a trade gap of ¥634.5 billion.

What it signals for the wider AI buildout

The strength showing up in Japanese factories is consistent with broader industry forecasts. SEMI expects worldwide spending on 300mm fab equipment to rise 18% to $133 billion in 2026 and another 14% to $151 billion in 2027, crossing $150 billion for the first time.

Japan is not only supplying the AI buildout; it is investing heavily in it at home. The trade ministry said in July it would purchase 27,500 of Nvidia’s (NASDAQ: NVDA) next-generation Rubin chips for Noetra, a SoftBank-led sovereign AI project backed by ¥1 trillion over five years, as Cryptopolitan reported.

Bringing all the information together, we can conclude that Japan is benefiting from AI investments at all stages of the supply chain due to increased factory orders, record levels of exports and domestic purchases of chips.

There is one significant restriction in this situation. As the BOJ survey indicated, small companies are still facing challenges in transferring their increasing input costs to customers, while producer prices are up 7.2 percent year-on-year in July. Due to strong exports, this inflationary pressure could justify another rise in interest rates by the Bank of Japan, which might take place as early as September.