Japan Services PMI: Growth Slows in July Amid Rising Prices

The latest S&P Global Japan Services PMI indicates a slowdown in the service sector's recovery, with the Services Business Activity Index declining to 51.2 in July from 52.2 in June. This marks the second consecutive month of growth but at a significantly reduced pace compared to earlier in the year.

Total new business increased only marginally, reflecting the slowest growth rate in the current 25-month expansion. Foreign demand for Japanese services has also contracted for the fourth consecutive month, although the decline is easing.

Input costs surged sharply, nearing June's four-year record, driven by factors including the ongoing conflict in the Middle East, rising labor costs, and a depreciating yen. As a result, firms have implemented substantial price increases, leading to the second-sharpest rise in selling prices on record.

Employment growth has slowed, with backlogs of work increasing at their weakest rate in 17 months. Business confidence has moderated, attributed to supply chain disruptions, rising costs, an aging population, and labor shortages. This sentiment is among the lowest recorded since the pandemic.

At the composite level, which includes manufacturing, the S&P Global Japan Composite Output Index remained stable at 52.7, slightly down from 52.8 in June. The manufacturing sector has shown resilience, with output rising at its fastest pace since early 2014, offsetting the slower growth in services.

Annabel Fiddes, economics associate director at S&P Global Market Intelligence, noted that while the manufacturing sector's performance has been strong, the overall growth trajectory has shifted lower, particularly in light of escalating cost pressures and rising prices. The ongoing inflationary environment may prompt the Bank of Japan to consider further policy adjustments in the coming months.