Japan's services activity stagnates in May as costs surge, PMI shows

Japan's services sector activity stalled in May, marking the end of a 13-month period of expansion, according to a private survey. The downturn was primarily driven by escalating costs, linked to the ongoing Middle East conflict, which weakened service demand and contributed to a significant surge in output price inflation.

The S&P Global final Japan Services Purchasing Managers' Index (PMI) dropped to 50.0 in May, down from 51.0 in April. A reading above 50.0 indicates growth, while a figure below signifies contraction. New business growth slowed for the third consecutive month, reaching its weakest pace in nearly two years. Notably, new export business experienced a sharp decline, registering the most significant drop since March 2022, as sluggish external demand and rising prices impacted overseas sales.

Cost pressures intensified considerably, with input prices rising at the fastest rate in over three years. This surge was attributed to supplier price increases for fuel, energy, and raw materials, exacerbated by the Middle East war, as well as higher labor costs. In response, service providers increased their selling prices at the quickest pace since April 2014.

Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence, noted that rising prices have strained household budgets, impacting demand within the service sector. Employment growth also decelerated, reaching its slowest rate in nine months, with some firms citing retirements and resignations as factors limiting workforce expansion.

Business confidence regarding the year-ahead outlook saw a slight improvement for the second month but remained below the post-pandemic average. Geopolitical uncertainty, escalating costs, and demographic challenges continue to weigh on sentiment. The broader Japan Composite PMI, encompassing both manufacturing and services, also fell to 51.1 in May from 52.2 in April, indicating the slowest growth in five months. The manufacturing sector's relative strength is partly supported by temporary inventory building, which is expected to diminish if global economic conditions remain fragile.

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Rising prices have also impacted demand, especially within the service sector, as households' budgets have come under greater strain.