The latest data released by S&P Global indicates that Japan's services Purchasing Managers' Index (PMI) for October fell to 49.7, marking the first dip below the critical threshold of 50 since June, indicating that the sector has entered a contraction phase. Weak market demand led to the lowest industry confidence level in 31 months, with particularly weak performance in the fields of information and communication, real estate, business services, and transportation. Previously, the services PMI for September was at 53.1, and October's decline reflects a stall in industry activity at the start of the fourth quarter.
S&P Global economist Usamah Bhatti pointed out that sluggish sales were the main reason for the contraction in October's service activity. The survey reveals that new business inflow in Japan slowed down, and overseas demand contracted for the first time since July. The decline in international market demand for Japan's services sector has also led to the lowest optimistic growth expectation for the industry in two and a half years.
Rising costs have exerted additional pressure on corporate profitability, with labor and raw material price increases intensifying inflation, and the yen's depreciation leading to higher import costs posing greater challenges for businesses. Although service companies maintained fee levels, there was no significant acceleration in price increases, limiting the ability to cope with rising costs.
Meanwhile, Japan's composite PMI, which includes both manufacturing and services, also fell from 52.0 in September to 49.6 in October, hitting a new low since November last year. With exacerbating issues such as weak external demand and labor shortages, Japan's short-term economic outlook is concerning.
The third-quarter GDP data, expected to be released on November 15, is anticipated to reveal more signs of weakness, with market forecasts predicting a slowdown in GDP growth due to weaker consumption and capital expenditure, further dragging down the pace of economic recovery.
