Japan’s Service Sector Growth Slows in May Amid Weak Demand and High Costs

Japan’s service sector growth slowed in May, highlighting broader concerns about the country’s economic momentum as factory activity continues to contract. According to the final au Jibun Bank Japan Services PMI released Wednesday, the index dropped to 51.0 in May from April’s 52.4, slightly above the flash reading of 50.8. A PMI above 50 indicates expansion, while below signals contraction.

New business in the service sector expanded at its slowest pace since November, while employment growth fell to its weakest rate since December 2023. Despite the decline, business sentiment improved modestly, reaching a three-month high, though it remained below the post-COVID average.

Annabel Fiddes of S&P Global Market Intelligence noted that service providers are facing persistent uncertainty due to global demand concerns, labor shortages, and rising costs. Input price inflation, driven by energy, transportation, and labor expenses, remained elevated, prompting firms to continue increasing output prices in line with April’s pace.

While input cost inflation eased from April’s 26-month peak, it still suggests that Japan’s official inflation data will stay elevated. This sustained pressure may hinder a strong recovery in private sector activity.

The composite PMI, which includes both manufacturing and services, slipped to 50.2 in May from 51.2 in April, signaling near-stagnant overall economic activity. Analysts warn that weakening demand could delay recovery and lead to more conservative hiring in the coming months.

The subdued PMI data reflects ongoing challenges for Japan’s economy, with sluggish domestic demand and persistent cost pressures clouding the outlook for growth. Businesses remain wary of future conditions as uncertainties surrounding global demand and rising operational expenses persist.