Japan services PMI slows as export orders fall

The slowdown matters because services make up the largest share of Japan’s economy and have been a key offset to patchy factory performance. The latest reading suggests domestic demand is still carrying the sector, but not strongly enough to fully counter weaker external demand and temporary shock from the earthquake disruption cited in the survey.

New orders rose for a 27th straight month, yet at a slower pace than in August. Export orders fell again, and S&P Global said the decline was the second-steepest since January 2021, underscoring how fragile overseas demand remains even as Japan benefits from comparatively steady local consumption.

Hiring remained a bright spot. Employment increased for a 13th consecutive month and at the fastest pace since February, while backlogs of work rose at the sharpest rate in seven months as firms looked to expand capacity and fill vacancies. That points to underlying demand pressure, but also to an economy still constrained by labor shortages.

Cost inflation eased to a six-month low, though it stayed elevated by historical standards as companies continued to face higher raw material, oil, labor and food costs. Service providers also raised selling prices again, suggesting inflation pressures have not fully faded and could keep the Bank of Japan focused on the pace of domestic demand and wage pass-through.

The broader composite PMI, which includes manufacturing and services, slipped to 52.3 from 53.5, the weakest since May. That lines up with the BOJ’s quarterly Tankan survey, which showed manufacturers at an eight-year high while non-manufacturers lost confidence, reinforcing the split between Japan’s industrial and consumer-facing parts of the economy.

For investors, the message is that Japan is still growing, but momentum is uneven. The data support the case for continued caution on domestically sensitive sectors, even as labor market strength and persistent service-price inflation keep alive expectations that policy normalization remains on the table.

Markets will now look to upcoming BOJ commentary and the next round of activity and inflation data for clues on whether services can regain speed or whether September marks the start of a broader slowdown.