The combination of softening services growth and near-record selling price increases points to a stagflation-adjacent dynamic that is likely to keep pressure on the Bank of Japan to continue tightening, consistent with the direction signalled in the June meeting minutes. The survey’s own commentary flags that the price indices suggest official inflation measures could move higher still, reinforcing the case for further policy normalisation even as underlying growth momentum cools. A notable divergence between a stronger manufacturing sector, posting its quickest factory output growth since early 2014, and a service sector losing steam suggests the composite headline is masking a weakening private consumption backdrop, echoing concerns raised in the BoJ minutes about a deteriorating terms of trade. Business confidence falling to among its lowest levels since the pandemic, driven by Middle East-linked cost pressures and labour shortages, adds a note of caution to the otherwise resilient composite output figure.
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Earlier:
- Bank of Japan June meeting minutes: 7-1 vote to raise rate to 1.0% amid inflation risk
- Japan real wages rise for sixth straight month, supporting BoJ rate hike (eventually) case
Japan’s service sector recovery lost momentum in July even as firms pushed through near-record price increases to protect margins against surging costs.
Summary:
- Services Business Activity Index fell to 51.2 in July from 52.2 in June, a second consecutive monthly rise in activity but at a much slower pace than seen earlier in the year
- Total new business grew only marginally, the slowest pace in the current 25-month expansion, while foreign demand for Japanese services fell for a fourth straight month, albeit at the weakest rate of decline since April
- Input costs rose sharply, close to June’s four-year record, linked to the Middle East conflict, higher staff costs and a weak yen, driving the second-sharpest rise in selling prices on record
- Employment growth slowed to a marginal pace amid easing capacity pressures, with backlogs of work rising at their weakest rate in 17 months
- Business confidence for the year ahead moderated to among the lowest levels recorded since the pandemic, citing supply chain disruption, rising costs, an ageing population and labour shortages
- The Composite Output Index was little changed at 52.7 in July from 52.8 in June, as the fastest rise in factory production since early 2014 offset the softer services performance
- Composite employment rose for a 34th consecutive month, though job creation eased slightly, while average selling prices at the composite level rose at their second-fastest pace since the series began in late 2007
Japan’s service sector expanded for a second consecutive month in July, but at a markedly slower pace than earlier in the year, according to the latest S&P Global Japan Services PMI, as firms continued to push through some of the sharpest price increases on record to offset surging costs. The Services Business Activity Index fell to 51.2 from 52.2 in June, with the rate of expansion easing well below the levels recorded during the opening quarter of 2026. Surveyed firms pointed to events, promotional activity and new contract wins as supports for the latest upturn, though several noted relatively muted underlying demand.
Total new business rose only marginally in July, the slowest pace of growth in the current 25-month expansion sequence, while foreign demand for Japanese services fell for a fourth consecutive month, though the pace of decline eased to its weakest since April. That subdued demand backdrop coincided with a further marked rise in input costs, with Japanese services firms reporting a substantial increase in operating expenses that held close to June’s four-year record. Firms linked the latest cost pressures to the war in the Middle East, higher staff costs and a weak yen exchange rate, and looked to pass on those higher costs to clients where possible, driving the second-sharpest increase in selling prices on record.
Employment growth slowed to a marginal pace in July amid signs of easing capacity pressures, with backlogs of work increasing at only a fractional rate, the weakest in 17 months. Business confidence regarding the year ahead also moderated, with supply chain disruption and rising costs linked largely to the Middle East conflict, alongside an ageing population and ongoing labour shortages, dampening optimism. The survey noted that positive sentiment was among the lowest levels recorded since the pandemic.
At the composite level, combining services with manufacturing, the S&P Global Japan Composite Output Index came in at 52.7 in July, little changed from 52.8 in June, signalling another solid increase in overall output despite the diverging sector trends. Manufacturing output rose at its quickest pace since early 2014, offsetting the slower and only modest rise in service sector activity. Overall new orders increased at a softer and milder pace, despite a steeper upturn in new export business, while composite employment rose for a 34th consecutive month, though the rate of job creation eased slightly from June.
Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said the recovery in Japan’s service sector had lost momentum in July, with firms signalling slower increases in both business activity and new orders compared with June, against a backdrop of substantial cost pressures and sharply rising selling prices. She noted that a stronger manufacturing performance had offset the services slowdown, keeping overall business activity rising solidly, though the broader growth trajectory had shifted lower than that seen earlier in the year before the conflict in the Middle East began. Fiddes added that with cost inflation remaining rapid across both sectors and average selling prices rising at the second-sharpest rate in nearly two decades of data collection, the price indices suggest official inflation measures could move higher and add further pressure on the Bank of Japan to raise its policy rate in the coming months.
This article was written by Eamonn Sheridan at investinglive.com.