Japan Service Sector Growth Cools to 51.3 in September as Orders Slow

Japan’s service sector expansion slowed in September. Business activity lost momentum, export demand weakened, and earthquake disruptions cut foot traffic across regional consumer hubs.

The final S&P Global Japan Services Purchasing Managers’ Index fell to 51.3 in September from a five-month high of 52.5 in August. That missed the preliminary flash estimate of 51.6. Still, the index remained above the 50-mark threshold separating sector expansion from contraction.

Domestic Demand Carries Sales as Exports Slump

New orders across service providers rose for a 27th consecutive month, supported by domestic customer traffic and local consumption. Overall order growth moderated from August. Fresh export business dropped at the second-steepest rate recorded since January 2021.

Earthquake disruptions during the month forced temporary pauses in regional travel and hospitality bookings, reducing transactions across retail and leisure locations. Local shoppers continued to buy. In contrast, foreign client orders dried up across business-to-business and cross-border services.

“PMI survey data pointed to a softer expansion of Japan’s service sector as the third quarter drew to a close, with businesses signalling slower increases in business activity and new orders,” said Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence.

Labour Shortages Drive Backlogs to Seven-Month High

Hiring across service businesses rose for a 13th straight month to log its quickest pace of workforce expansion since February. Service operators added staff aggressively to fill floor vacancies and build operational capacity ahead of the final quarter.

Despite faster recruitment, backlogs of outstanding work climbed at the sharpest rate in seven months. Hospitality, food service, and transport providers in urban centres continued to struggle with customer volumes on existing staffing levels.

Input Price Pressures Ease to Six-Month Low

Operating expenses climbed again in September, but the rate of input cost inflation cooled to a six-month low. Service firms reported that procurement budgets remained squeezed by elevated prices for food ingredients, raw materials, energy, and wage increases.

Charges levied on diners and shoppers increased during the month. The pace of those price hikes softened from August as merchants weighed customer resistance against wholesale costs.

Divergence Across Manufacturing and Services

The broader Composite PMI, which tracks combined output across both manufacturing and service companies, dropped to 52.3 in September from 53.5 in August. It was the composite index’s lowest reading since May.

That slowdown reflects the Bank of Japan’s quarterly tankan survey, which showed sentiment among non-manufacturers soured in the July to September quarter even as factory sentiment reached an eight-year high. Retailers and consumer service operators now look to fourth-quarter wage negotiations and central bank policy decisions to gauge domestic spending power.