Japan's Service Activity Declines in October

TOKYO (Reuters) – Japan's service activity contracted in October due to weaker sales, causing business confidence to drop to its lowest level since March 2022, a private survey indicated on Wednesday.

The final au Jibun Bank Service Purchasing Managers' Index (PMI) decreased to 49.7 in October from 53.1 in September, as reported by S&P Global Intelligence. This reading exceeded a preliminary estimate of 49.3 but fell below the crucial 50.0 mark, which separates expansion from contraction, for the first time since June.

"The strength of performance in the Japanese service sector came to an abrupt halt at the start of the fourth quarter," stated Usamah Bhatti, economist at S&P Global Market Intelligence. He noted that the downturn was primarily driven by slower sales.

The services industry has been a critical component of Japan's economy, helping to sustain growth despite challenges in the manufacturing sector. However, persistent concerns regarding labor shortages have negatively impacted the business outlook for the next year, with the index reaching its lowest level in 31 months. Despite this, businesses perceived the decline as a temporary setback, with overall confidence remaining robust, according to Bhatti.

In October, the pace of new business inflows slowed, with overseas demand slipping into contraction for the first time since July. Furthermore, the service sector experienced a decline in outstanding business for the second time in three months due to soft demand.

These trends suggest tough times ahead for Japan's economy, which is already grappling with weak consumer demand. The country's third-quarter gross domestic product, set to be released on November 15, is anticipated to show a significant slowdown linked to poor consumption and capital spending.

In October, inflation rose above the long-term average due to increasing labor and raw material costs, compounded by a weak yen. Service companies continued to pass these costs onto customers at a rate similar to September.

The composite PMI, which integrates both manufacturing and service activities, fell to 49.6 in October from 52.0 in September, marking the lowest level since November of the previous year.