Japan Services PMI Hits 52.2, Cost Pressures Keep BOJ on Watch

Japan's service sector snapped a month of stagnation in June, pushing overall business activity to its fastest clip in three months. The final S&P Global Japan Services PMI Business Activity Index rose to 52.2 from May's flat 50.0 reading. The Composite Output Index, which blends manufacturing and services, ticked up to 52.8 from 51.1, helped by a pickup in factory output alongside the services recovery.

Domestic demand carried the load. S&P Global said new orders across both sectors expanded at the second-fastest pace in three years, driven by firmer home-market conditions. Export demand told a different story. New export business grew at the slowest pace in six months, with service providers reporting a drop in overseas orders partly tied to fewer tourist arrivals. Business activity still expanded for the 14th time in 15 months, with firms pointing to higher work volumes and upcoming events.

The inflation side of the survey is what keeps the Bank of Japan paying attention. Input costs rose at the fastest pace in four years. S&P Global cited supply-chain strains from the Middle East conflict as a factor. Firms passed those costs through with another marked increase in selling prices. Business confidence edged up only slightly. Companies cited uncertainty around geopolitics and rising costs as reasons to stay cautious on the outlook.

The composite reading suggests Japan's economy is still growing at a moderate pace. The cost data means the BOJ's inflation watch is not going away anytime soon.