Japan services PMI fell to 51.2 in July as selling prices neared record highs, keeping pressure on the Bank of Japan to raise rates, S&P Global said. Composite output held steady at 52.7.
Alpha Score of 52 reflects moderate overall profile with weak momentum, moderate value, moderate quality, moderate sentiment.
Japan's service sector expansion slowed in July even as firms pushed through near-record price increases to protect margins, a combination that keeps the Bank of Japan on a tightening trajectory, according to S&P Global data.
The Services Business Activity Index fell to 51.2 from 52.2, well below the pace recorded during the first quarter. Surveyed firms pointed to events and promotional activity as supports, though several noted muted underlying demand. Total new business rose at the slowest rate in the current 25-month expansion sequence. Foreign demand for Japanese services fell for a fourth consecutive month, though the pace of decline eased to its weakest since April.
Input costs continued to rise sharply, holding close to June's four-year record. Companies linked the pressures to the Middle East conflict, higher staff costs and a weak yen. They passed on costs where possible, driving the second-sharpest increase in selling prices in nearly two decades of data collection. Employment growth slowed to a marginal pace, with backlogs of work rising at only a fractional rate, the weakest in 17 months. Business confidence regarding the year ahead moderated, with supply chain disruption and labour shortages dampening optimism. The survey noted that positive sentiment was among the lowest levels recorded since the pandemic.
Manufacturing output rose at its quickest pace since early 2014, offsetting the slower services activity. The composite output index came in at 52.7 in July, little changed from 52.8 in June, signalling another solid increase overall.
Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said the services recovery had lost momentum in July. A stronger manufacturing performance kept overall activity rising, but the broader growth trajectory had shifted lower than before the Middle East conflict began. With cost inflation rapid across both sectors and selling prices rising at the second-sharpest rate on record, the price indices suggest official inflation measures could move higher, she said, adding further pressure on the Bank of Japan to raise its policy rate in the coming months.
The data reinforces expectations that the BoJ will continue normalising policy after its July rate hike. The yen, which has been under pressure, saw limited immediate reaction, though the dollar held above JPY 160 after the earlier move. The combination of cooling service sector momentum and persistent price pressures creates a challenging backdrop for the central bank as it weighs the pace of further tightening. JGB yields edged higher on the session, reflecting the inflation signal from the PMI.
For currency markets, the divergence between a strong manufacturing sector and a softening services economy may complicate the BoJ's communication. The weak yen itself remains a key driver of input costs, a dynamic the central bank has flagged as a risk to its inflation outlook. The next policy meeting in September will be closely watched for any shift in language around the pace of rate increases.
Fiddes noted that the price indices suggest official inflation measures could move higher, adding that the BoJ faces continued pressure to act. The composite PMI held steady, but the underlying mix points to a more fragmented economy, with the service sector's loss of momentum raising questions about the durability of domestic demand.
Drafted by a large language model from the source reporting linked above, then screened by automated publishing checks. It is not read by a journalist before publication. Some articles cite our Alpha Score. Verify prices and figures against the original source. Educational coverage, not personalized advice.