Japanese Manufacturers Keep Growing as Services Slow

Japan's manufacturing sector continued to show signs of growth in July, according to the latest flash PMI survey from S&P Global. The reading came in at 54.7, just below June's 54.8 but still comfortably above the line between expansion and contraction. New orders and output drove this growth, with factories reporting their fastest output growth since February 2014 and a significant increase in new orders.

The services sector, on the other hand, showed less momentum, with the PMI dipping to 51.9 from 52.2 in June. This split between manufacturing and services is notable because it has implications for inflation. While overall input-cost inflation cooled to a three-month low, companies still pushed through price increases, led by service providers raising prices at the fastest pace in over 12 years.

This development is significant for markets because it points to domestically driven inflation. S&P Global's economist Usamah Bhatti noted that when service firms can raise prices quickly despite easing cost pressures, it often indicates tight labor and capacity constraints driving demand. This type of inflation tends to be more 'sticky' than goods or energy-led spikes, which could keep upward pressure on Japanese government bond yields and support the yen.