TOKYO, (Reuters) - Japanese manufacturing activity has expanded in December, a preliminary survey showed on Friday, but export orders have contracted at the fastest pace in more than two years, a worrying sign of weakening overseas demand.
The Flash Markit/Nikkei Japan Manufacturing Purchasing Managers' Index (PMI) was a seasonally adjusted 52.4 in December from a final 52.2 in November.
The index remained above the 50 threshold that separates contraction from expansion for the 28th consecutive month.
The flash index for output rose to 53.7, the highest level in eight months, from a final 52.4 for November.
However, the index for export orders fell to a preliminary 48.0 in December from a final 50.8 in the previous month, experiencing sharpest contraction since August 2016.
Joe Hayes, economist at IHS Markit, which compiles the survey, said that based on PMI data so far in the fourth quarter, "the case for a year-end rebound in gross domestic product looks strong".
But the survey data "does bring some cautious undertones to the fore" he said, noting the sharp decline in export orders and how total demand "picked up only modestly".
The survey also showed that business optimism weakened for a seventh consecutive month, suggesting that risks posed by trade protectionism and a slowdown in overseas economies are weighing on corporate sentiment.
On Dec. 1, U.S. President Donald Trump and Chinese President Xi Jinping agreed to a truce that delayed a planned U.S. increase of tariffs on Chinese goods.
However, it is uncertain whether the world's two-largest economies can settle their differences on trade practices.
Data last weekend showed a sharp slowdown in growth of Chinese imports and exports in November, underscoring the threat trade friction poses to China's economy.
Japan's export-oriented economy is sensitive to changes in global demand and remains vulnerable if trade friction between the United States and China escalates next year.