Japan's service activity expands for second straight month

Japan's service sector activity expanded in December, driven by strong demand and continued business growth, according to the final au Jibun Bank Services PMI by S&P Global Market Intelligence.

The PMI rose to 50.9, up from 50.5 in November, marking the second consecutive month above the 50.0 threshold that separates expansion from contraction.

While the final figure was slightly below the preliminary reading of 51.4, the survey highlighted consistent increases in business activity and new orders, reflecting a positive trajectory for the sector.

The numbers were also softer than the 2024 average of 52.4.

Commenting on the latest survey results, Usamah Bhatti, Economist at S&P Global Market Intelligence, noted:

Bhatti added that growth in private sector output was bolstered by rising service sector activity and a milder decline in manufacturing output.

"While overall growth remained modest, new orders rose faster since August, and outstanding business, especially in manufacturing, supported output. Despite this, optimism about future output softened and fell below the 2024 average," the economist noted.

The au Jibun Bank Japan Services PMI, compiled by S&P Global, is based on survey responses from approximately 400 service sector companies.

The surveyed sectors include consumer services (excluding retail), transport, information, communication, finance, insurance, real estate, and business services.

What led to Japan's service activity growth?

The subindex for new business rose for the sixth consecutive month, hitting its highest level in four months.

Service sector firms reported a moderate increase in new orders, while manufacturers saw a slight decline in new work.

Average prices charged by private sector firms rose at the fastest rate since May as companies partially passed on higher costs to customers.

Input prices overall increased at a stronger and quicker pace than in November.

Workforce expansion continued for the 15th straight month, although the pace of hiring slowed compared to November.

Businesses indicated that recruitment aligned with expansion plans.

Inflation and Bank of Japan policy outlook

Inflationary pressures remained steady compared to the previous month, with both input price inflation and charge inflation staying well above their long-run averages.

While firms passed on the higher costs to clients, the rate of price increases remained stable from November.

The composite PMI, combining manufacturing and services, edged up to 50.5 in December from 50.1 in November, suggesting marginal overall economic expansion.

The persistent inflation in the service sector strengthens expectations for the Bank of Japan (BOJ) to consider a rate hike.

Governor Kazuo Ueda has signaled the need to monitor global economic conditions, including policies under US President-elect Donald Trump.

The BOJ's next policy meeting is scheduled for January 23-24.

This steady service-sector performance adds weight to speculation about potential policy shifts at the upcoming BOJ meeting.