Japan’s services sector continued to demonstrate resilience in September, with business activity accelerating modestly as robust domestic demand offset persistent weakness in external markets, according to the S&P Global Japan Services Purchasing Managers’ Index (PMI) released on Friday.
The final Japan Services PMI rose to 53.3 in September, up slightly from 53.1 in August and above the preliminary estimate of 53.0. This marks the 11th consecutive month of expansion in the sector, firmly above the 50.0 threshold that separates growth from contraction.
Domestic Demand Fuels Expansion
The report highlighted that new business inflows continued to rise, driven primarily by domestic clients, while new export orders fell for the third straight month signalling that external demand remains under pressure amid slowing global trade and geopolitical uncertainty.
Employment in the service sector expanded modestly, as firms increased hiring to accommodate rising workloads and in anticipation of stronger demand in the months ahead. Business sentiment also improved, with confidence reaching an eight-month high, supported by planned expansions, product launches, and positive demand forecasts.
Inflation Pressures Ease Slightly
While input cost inflation eased marginally compared to August, companies continued to report high expenses tied to labour, energy, and raw materials. This led many firms to raise output prices, maintaining upward pressure on service-sector inflation.
The survey indicated that while cost pressures are gradually stabilizing, price passthrough to customers remains a key theme as service providers strive to protect margins.
Manufacturing Weakness Drags Composite Index
Despite the strong performance in services, the S&P Global Japan Composite PMI which combines both manufacturing and services activity fell to 51.3 in September from 52.0 in August, marking the slowest pace of overall private-sector growth since May.
The deceleration reflects the deepening contraction in factory output, with manufacturers continuing to face declining export demand and supply chain disruptions.
“The survey data also suggest that growth is being largely driven by stronger domestic demand, as both manufacturers and services companies noted further falls in new export business,”
said Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence.
Outlook: Resilient Services vs. Manufacturing Headwinds
Recent findings from the Bank of Japan’s quarterly survey suggest that Japanese firms are gradually adapting to the impact of U.S. tariffs, though labour shortages, rising wage pressures, and slower tourist inflows continue to cloud the outlook.
The divergence between the resilient service sector and weak manufacturing performance underscores Japan’s two-speed economy where domestic consumption and services remain supportive, but external demand and industrial output continue to lag.
Source: Reuters
