Japan services sector shrinks in June, raises concern over weak consumer spending

Japan’s services sector contracted in June, raising concerns over the country’s weak consumer spending, as new businesses shrank at the fastest pace in almost five years, a private business survey showed on Tuesday. Services account for almost 70 percent of Japan’s gross domestic product, while manufacturing contributed 18.7 percent to the GDP in 2014.

The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) fell to 49.4 in June from 50.4 in May on a seasonally adjusted basis. The index fell below the 50 threshold that separates expansion from contraction for the first time in two months. The index for new business fell to 47.3 from 50.4 in the previous month to reach the lowest since September 2011.

The composite index for output in both manufacturing and services fell to 49.0 in June from 49.2 in May on a seasonally adjusted basis, showing the fourth consecutive month of contraction. Business confidence remained subdued in the second quarter and consumer prices also fell in May at the fastest pace in three years, data showed last week, heightening pressure on the Bank of Japan to expand quantitative easing.

"The main driver behind the fall in output was a marked decline in total new orders, which decreased at the sharpest rate in nearly five years," said Amy Brownbill, Economist, Markit.

Meanwhile, the government has taken steps to boost fiscal spending in an attempt to rejuvenate weak overseas demand that is hurting exports. However, critics have warned that pumping in more money in to the economy cannot solely solve chronic problems such as low productivity and a rapidly shrinking labor force.