Impacted by Middle East conflict, Japan's service sector activity stalled in May

Source: Global Market Report

A private survey released on Tuesday showed that Japan's service sector stalled in May after more than a year of expansion. Soaring costs related to Middle East conflicts suppressed service demand and drove output price inflation to its highest level in 12 years.

The S&P Global Japan Services Purchasing Managers' Index (PMI) final reading fell from 51.0 in April to 50.0 in May, ending a 13-month streak of expansion. A PMI above 50.0 indicates growth in economic activity, while a reading below 50.0 suggests contraction.

New business growth slowed for the third consecutive month, hitting its lowest level in nearly two years. Notably, new export business saw a significant decline, marking the largest drop since March 2022, as weak external demand and rising prices weighed on overseas sales.

Meanwhile, cost pressures intensified sharply. Input prices rose at the fastest pace in more than three years. The survey indicated that price surges were mainly due to higher prices for fuel, energy, and raw material suppliers during the Middle East conflicts, along with rising labor costs.

In response, service providers raised selling prices at the fastest rate since April 2014, when Japan increased the consumption tax from 5% to 8%, triggering a wave of price hikes.

Annabel Fiddes, Associate Director of Economics at S&P Global Market Intelligence, said: "Rising prices have also weighed on demand, especially in the services sector, as household budgets face greater pressure."

Service sector employment growth slowed to a nine-month low. Some companies noted that employee retirements and departures were restraining labor force expansion.

The survey showed that business confidence in the outlook for the next year improved slightly for the second consecutive month, but optimism remained below the post-pandemic average due to geopolitical uncertainty, rising costs, and demographic challenges.