Japan's Service Sector Activity

TOKYO (Reuters) – Japan's service sector activity expanded for the third straight month in September, but the pace slowed slightly and confidence dipped, indicating broader economic strains amid manufacturing weakness, according to a private survey released on Thursday.

The final au Jibun Bank Service purchasing managers' index (PMI) dropped to 53.1 in September from 53.7 in August, as reported by index publisher S&P Global Intelligence. Although it was below the flash reading of 53.9, it remained above the 50.0 threshold that separates expansion from contraction, suggesting sustained growth in the three months leading to September.

The services industry has served as a bright spot for Japan, the world's fourth-largest economy, helping to anchor growth and offset weakness in the manufacturing sector. For September, new business growth in service companies remained in expansion territory for the third consecutive month, bolstered by solid demand.

Despite this, business confidence declined to a 20-month low, driven mainly by challenges in the manufacturing sector that weighed on overall growth in new business. Usamah Bhatti, economist at S&P Global Market Intelligence, highlighted that the service sector's response to upcoming risks, including a stagnant economy, will be crucial for the performance of the broader private sector.

Japan's economy recorded an annualized growth rate of 2.9% in the second quarter, supported by steady wage increases fostering consumer spending. Although capital expenditure continues to rise, sluggish demand in China and slowing growth in the U.S. suggest that a robust recovery for the export-reliant country is still some way off.

Exports saw growth for two consecutive months, but the pace slowed from August, with weak demand reported in key markets such as mainland China. Additionally, while input inflation dipped to a six-month low, it remained above the long-run average due to a weak yen impacting wages and prices for food and imported raw materials. Service companies have also been passing increased costs related to wages and raw materials onto customers.

The composite PMI, which combines manufacturing and service activities, fell to 52.0 in September from 52.9 in the previous month.