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Japan's Service Sector Stagnates in May on Surging Costs

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Japan's Service Sector Stagnates in May on Surging Costs

Japan's service sector stagnated in May as supplier costs surged amid the ongoing conflict in the Middle East.

The S&P Global Japan Services Business Activity Index fell to the neutral 50.0 mark from 51.0 in April, ending a 13-month streak of expansion. A reading of 50.0 indicates no change in business activity from the previous month.

"The ongoing war in the Middle East continued to exert pressure on the economy, most notably by driving a substantial increase in costs for businesses," Annabel Fiddes, S&P Global Market Intelligence's economics associate director, said. "Price indicators in May pointed to a record rise in selling prices for goods and services amid a near unprecedented increase in business costs, largely due to widespread supplier price hikes and supply chain disruption, but also higher labor costs."

Average input prices rose to a 43-month high as the war in Iran triggered a spike in fuel, energy and raw material prices.

In April, Japan's inflation slowed down, with the consumer price index decelerating to a 1.4% rise from the prior month's 1.8% growth, according to data from the Statistics Bureau.

Some survey participants said activity levels rose because of higher sales and new business lines, while others said demand was weak and the growth of new orders slowed down, S&P Global said.

Government data showed that firms' spending during the first quarter was flat. Capital spending dropped 2%, a far cry from the 6.5% growth in the previous quarter, reflecting cautiousness in spending amid the Middle East war, which brought disruption in the global supply chain.

Meanwhile, employment grew at the slowest rate in nine months, S&P Global said. Government data showed that the number of employed people in April rose to 68.8 million from 68.2 million in March, while the unemployment rate eased month on month to 2.5% from 2.7%.

Business sentiment stayed weaker than the post-pandemic trend despite slightly improving for the second straight month, as businesses are concerned over geopolitical uncertainty, rising costs and the ageing population, according to the ratings firm.

Overall, the S&P Global Japan Composite PMI Output Index fell to 51.1 in May from 52.2 in April, pointing to only modest growth in broader private sector business activity.

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