Japan services activity rebounds as input costs hit four-year inflation high
Before we begin, make sure you have seen this:
—
The rebound in Japan’s services PMI to a modest but genuine expansion, alongside the fastest input cost inflation since June 2022, keeps pressure on the Bank of Japan’s case that underlying price momentum remains firm enough to justify further policy normalisation, even as officials weigh soft business confidence against resilient domestic demand. The divergence between strong domestic new work and weakening export orders, tied to falling tourist numbers and subdued overseas demand, points to a two-speed economy that could complicate the yen outlook if inbound tourism continues to soften. Subdued year-ahead sentiment, driven largely by Middle East war uncertainty rather than domestic factors, suggests firms remain cautious on investment despite June’s improved headline numbers.
—
Japan services activity rose to 52.2 in June from 50.0, the strongest new work growth in two years, but input costs climbed at the fastest pace since June 2022 and year-ahead confidence stayed subdued, S&P Global said.
Summary:
- The S&P Global Japan Services PMI Business Activity Index rose to 52.2 in June from a neutral 50.0 in May, signalling renewed growth after activity has now expanded in 14 of the past 15 months
- Total new work increased at one of the quickest rates in two years, despite a further marked reduction in new export business as overseas demand for services fell markedly amid lower tourist numbers
- Input prices rose at the fastest pace since June 2022, a four-year high, driving a further strong increase in selling prices, though output price inflation eased slightly from May’s near-record high
- Firms increased staff numbers again in June at a quicker pace than May, though job growth remained softer than the past year’s average, while unfinished work rose at the fastest pace since March
- Confidence in the year-ahead outlook remained subdued, among the lowest levels seen since the pandemic, with firms citing the Middle East war, rising costs and labour shortages as key concerns
- The Composite Output Index, blending manufacturing and services, rose to 52.8 in June from 51.1 in May, the quickest overall private-sector growth in three months
- New business across both manufacturing and services expanded at the second-steepest pace in three years, largely driven by firmer domestic demand rather than exports
Japan’s service sector returned to growth in June, with the S&P Global Japan Services PMI Business Activity Index rising to 52.2 from a neutral 50.0 in May, marking renewed expansion after activity has now grown in 14 of the past 15 months. The rate of growth was modest and slightly softer than the average pace seen over the past year, with firms often linking the upturn to a greater volume of new work and upcoming events, according to the survey. Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said the service sector’s move back into growth territory, combined with the manufacturing PMI results, signalled a slower and modest expansion of Japan’s private sector over the second quarter as a whole.
Total new work increased at one of the quickest rates seen over the past two years, with new business across both manufacturing and services expanding at the second-steepest pace in three years, a trend Fiddes attributed largely to firmer domestic demand. That strength stood in contrast to a further marked reduction in new export business, with new export orders rising at their slowest pace in six months as overseas demand for Japanese services fell markedly amid reports of lower tourist numbers.
Cost pressures intensified sharply over the period, with input prices rising at their fastest pace since June 2022, a four-year high, as firms cited increases in oil, energy, food and wage costs. Fiddes said the war in the Middle East continued to place pressure on supply chains and prices, driving a further marked rise in selling prices that suggested official price measures would likely move higher in the months ahead. Output price inflation did ease slightly from May’s near-record high, though it remained rapid overall.
Employment growth was mild, with firms increasing staff numbers at a slightly quicker pace than May but still below the past year’s average, as unfinished work rose at its fastest pace since March. Business confidence in the year-ahead outlook strengthened only slightly and remained among the lowest levels recorded since the pandemic, weighed down by uncertainty over the Middle East conflict, rising expenses and labour shortages. The broader Composite Output Index, which blends manufacturing and services, rose to 52.8 in June from 51.1 in May, its quickest pace of growth in three months, with faster manufacturing output accompanying the fresh rise in services activity.
This article was written by Eamonn Sheridan at investinglive.com.