Japan's service sector stumbles: a wake-up call for economic strategy

A private sector survey data shows that Japanese services activity in June contracted for the first time since August 2016, largely because of easing domestic demand. Notwithstanding the contraction, business confidence and hiring indicators rub off a positive note.

The service sector has turbocharged Japan's economy and so far has cushioned the blow from a poor performance in the manufacturing sector. The final au Jibun Bank Service Purchasing Managers' index (PMI) slid to 49.4 in June from 53.8 in May, bringing a 21-month streak of growth to an abrupt halt, the S&P Global Market Intelligence survey showed. The PMI was weaker than the preliminary figure of 49.8 and the first reading below the 50.0 threshold separating expansion from contraction since August 2022.

Trevor Balchin, economics director at S&P Global Market Intelligence, commented June's decline in new business simply reflects a pause in growth, rather than any great fall in demand.

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"Looking beyond the headline figure, the picture is less concerning," Balchin said.

Consumer services, finance and insurance, and real estate and business services were all seeing a fall in demand, but transports and storage together with information and communication rose in June. Meanwhile, the weak yen-the currency has lost over 12 per cent so far this year-boosted foreign demand for Japanese services.

While still broadly positive, at a slower pace, the 12-month outlook for employment and business confidence grew. At the same time, rising wages and food and fuel costs, along with the weaker yen, firmed up the input price increases, driving through the fastest rate of inflation since last August.

Companies continued to pass on price hikes to consumers against the backdrop of higher wages and material costs, and the pace of growth of average prices charged remained close to record levels seen in April and May.

The composite PMI, which combines manufacturing and services activity figures, fell to 49.7 in June from 52.6 in May indicating the first reading below the 50.0 level in seven months.

The economy now approaches a critical juncture, dependent as it has been on services to balance out a weak manufacturing sector, following the recent Japanese service sector contraction. In addition, the au Jibun Bank Service PMI final reading dropped to 49.4 in June, which signals no growth, even though business confidence and hiring indicators showed resilience and thus held some potential for recovery. However, these might be constrained by rising input costs and inflation. As these continue to be passed on to consumers from companies, the economic landscape will balance inflationary pressures with sustainable growth.