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Japan's Private Sector Expansion Weakens in May Amid Rising Costs

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Japan's Private Sector Expansion Weakens in May Amid Rising Costs

Japan's private sector growth slowed to a five-month low in May as services activity stalled and cost pressures intensified amid supply disruptions linked to the conflict in the Middle East, according to flash PMI data released Thursday by S&P Global.

The flash Japan Composite PMI Output Index fell to 51.1 in May from 52.2 in April, marking the slowest pace of expansion this year, though remaining above the 50 threshold that separates growth from contraction.

Manufacturing activity continued to drive overall growth, with the flash manufacturing PMI easing to 54.5 from 55.1, while the manufacturing output index slipped to 54.1 from 55.1.

S&P Global said manufacturing output continued to benefit from stockpiling activity as businesses sought to manage supply disruptions and higher prices linked to the ongoing conflict in the Middle East.

In contrast, the flash services PMI business activity index fell to 50.0 from 51.0, signaling stagnation in the sector following 13 straight months of growth.

Input costs across Japan's private sector rose at the fastest pace since October 2022, while selling price inflation accelerated to a record high in nearly 19 years of data collection.

"The latest Flash PMI data for Japan pointed to a further easing of growth momentum across the private sector during May," Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said in the report.

"At the same time, prices data painted an increasingly concerning picture for Japanese businesses," Fiddes added. "Overall, costs rose at the sharpest pace in three-and-a-half years, while selling price inflation quickened to a fresh survey high."

The data comes after Japan's economy grew an annualized 2.1% in the first quarter, according to preliminary Cabinet Office figures released earlier this week, beating Reuters poll expectations for 1.7% growth and suggesting the economy entered the second quarter with stronger-than-expected momentum.

The stronger-than-expected figures are also likely to factor into the Bank of Japan's assessment of whether the economy can withstand the ongoing energy crisis and support further interest rate increases as early as next month, Reuters said.

S&P Global said overall business confidence improved slightly from April but remained historically subdued as companies continued to express concerns over geopolitical uncertainty, supply chains, and inflation.

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