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Japan's Services Sector Rebounds in June Amid Rising Cost Pressures, S&P Global Survey Shows

Japan's services sector returned to growth in June after stalling in the previous month, according to data released by S&P Global on Friday.The latest reading, which gauges services activity, rose to 52.2 in June from 50.0 in May, signaling a renewed expansion in business activity after activity stalled the previous month.The broader Japan Composite Output Index, which combines manufacturing and services activity, increased to 52.8 from 51.1, marking the fastest expansion in overall private sector output in three months.The upturn was supported by a solid increase in new orders, with firms citing stronger domestic demand, new product launches, and upcoming events.Export business, however, declined further as weaker overseas demand and lower tourist arrivals weighed on sales.Input cost inflation accelerated to its fastest pace in four years, driven by higher oil, energy, food, and labor costs.Although firms continued to pass on higher expenses to customers, the pace of selling price inflation eased from May's near-record high.Service providers continued to add staff in June as they sought to expand capacity and fill vacancies.Although hiring picked up from May, the pace of job creation remained below the average seen over the past year, while unfinished work rose at the fastest rate since March."Japan's service sector moved back into growth territory in June and, when combined with the manufacturing PMI survey results, signalled a slower and modest expansion of Japan's private sector over the second quarter as a whole," Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said."The survey's price gauges signalled another rapid increase in costs, with expenses rising to the greatest extent in four years as the war in the Middle East continued to place pressure on supply chains and prices. This drove another marked rise in selling prices, to indicate that official price measures will likely move higher in the months ahead," she added.Business confidence improved slightly in June but remained among the weakest levels since the pandemic. Firms cited uncertainty surrounding the conflict in the Middle East, rising costs, and labor shortages as key concerns.The survey comes after the Bank of Japan raised its policy rate by 25 basis points to 1% last month, the highest level since 1995, citing growing inflation risks from higher energy costs and signaling that further policy tightening remains under consideration.Former Bank of Japan Executive Director Kenzo Yamamoto said the central bank could raise interest rates sooner than markets expect as it continues to normalize monetary policy, according to Bloomberg News."The BOJ is in a situation where it needs to move quickly," Yamamoto was quoted as saying by Bloomberg, adding that the next rate hike would likely come before December.