Japan Services Sector Slows but Inflation Pressures Persist

Japan's services sector showed signs of slowing growth in September, though it remained in expansion territory. The S&P Global Japan Services PMI dropped to 51.3 from August's five-month high of 52.5, marking the fourth consecutive month of growth. The deceleration was attributed to weaker export demand and disruptions from the Kumamoto earthquake. Despite the slowdown, domestic demand continued to support new orders, albeit at a softer pace.

Employment and backlogs of work surged, with hiring reaching its fastest pace since February and backlogs growing at the steepest rate in seven months. Business confidence also improved, hitting its highest level since June. However, input cost inflation, though easing to a six-month low, remained high due to rising costs of raw materials, staff, oil, and food. Output prices climbed at one of the fastest rates on record.

The Composite Output Index, which includes both manufacturing and services, slipped to 52.3 from 53.5, marking the 18th straight month of growth but the slowest pace since May. S&P Global suggested that the data supports the case for another Bank of Japan (BOJ) rate hike, potentially as early as October. The firm cited rapid cost and price increases, partly driven by the Middle East conflict and a weak yen, as reasons for further upward pressure on consumer inflation, which stood at 1.9% in August, just below the BOJ's 2% target.

Earlier, BOJ's Uchida warned about the demand shock from AI, cautioning of a potential correction risk. Despite the softer headline growth, the survey leaned hawkish for the BOJ, with factors like rising payrolls and building backlogs pointing to capacity pressures that justify another rate hike.