The manufacturing sector lost steam in July as demand for exports weakened.
The monthly Nikkei Japan Purchasing Managers Index for manufacturers showed a preliminary reading of 51.6, the lowest since November 2016 and down from 53 in June.
A reading above 50 indicates the sector is expanding, while one below that signals a contraction.
Output came in at 52.4, down from 53.6, and the index for stocks of finished goods fell.
“New business grew at a much weaker rate and was broadly flat, while export demand, despite further yen depreciation, deteriorated for a second month running,” said Joe Hayes, an economist at IHS Markit, which compiles the survey.
“Slowing demand presents a worrying development given input delivery times lengthened to the sharpest extent in over seven years,” he wrote in the data release.
While the economy remains on solid footing, other signs also point to slowing growth. Confidence among Japan’s large manufacturers cooled for a second quarter through June after reaching a 13-year high at the end of last year, according to the Bank of Japan’s latest tankan survey.
Still, large companies across all industries said they plan to raise fixed investment by 13.6 percent in the year through March, beating forecasts of 9.3 percent, the tankan showed.