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Japan’s services sector returned to growth in June after stagnating a month earlier, signalling that the country’s domestic economy remains resilient despite persistent inflationary pressures and growing uncertainty over geopolitical tensions.
The latest S&P Global Japan Services Purchasing Managers’ Index (PMI), released on Friday, rose to 52.2 in June from 50.0 in May, indicating that businesses ranging from restaurants and hotels to transport and financial services saw activity pick up during the month. A PMI reading above 50 signals expansion, while a reading below that level indicates contraction.
The rebound comes as Japan continues to rely on domestic consumption and the services economy to support growth at a time when exports face headwinds from slowing global demand and trade uncertainty.
The June reading marked the 14th expansion in the past 15 months, with only May interrupting the sector’s growth streak. While the pace of expansion improved, S&P Global said it remained modest compared with the average seen over the past year.
Stronger demand at home offsets weaker overseas business
A key driver behind the recovery was stronger domestic demand. Companies reported one of the fastest increases in new business in nearly two years, with firms in the transport industry citing new product launches and major events as factors boosting customer demand.
However, the picture outside Japan remained less encouraging.
New export business fell for the third consecutive month, suggesting that overseas demand for Japanese services continues to weaken amid an uncertain global economic environment.
The divergence highlights a broader trend in Japan’s economy, where domestic spending is increasingly compensating for softer international demand.
Rising costs remain a growing concern
While business activity improved, companies continued to battle mounting operating costs.
The survey showed that input prices rose at the fastest pace since June 2022, driven by higher oil and energy prices, more expensive food supplies and rising wages. The spike in costs comes as businesses across Japan continue to grapple with inflation after years of relatively stable prices.
Although firms continued to pass some of those higher costs on to customers, the pace of price increases slowed from May’s near-record levels. This suggests businesses are becoming more cautious about raising prices further for fear of weakening consumer demand.
Hiring improves, but confidence stays fragile
Employment in the services sector continued to grow in June, with companies hiring at a slightly faster pace than in May. However, job creation remained below the average seen over the previous 10 months, indicating businesses are still taking a measured approach to expanding their workforce.
Business confidence also remained subdued despite the improvement in activity.
“Although growth momentum improved, overall business confidence strengthened only slightly in June, as uncertainty over the war and rising expenses weighed on forecasts,” said Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence.
The survey suggests that companies remain concerned about geopolitical tensions in West Asia, volatile energy markets and the possibility that higher costs could squeeze profits in the months ahead.
Private sector posts strongest growth in three months
The broader Composite PMI, which combines manufacturing and services activity, climbed to 52.8 in June from 51.1 in May, marking the strongest expansion in Japan’s private sector in three months.
The data points to a stronger end to the second quarter for the world’s fourth-largest economy, with the services industry continuing to outperform manufacturing.
However, economists say sustaining the recovery will depend on whether domestic demand remains resilient enough to offset persistent inflation, weakening overseas demand and geopolitical uncertainties. With businesses facing the sharpest cost increases in three years and confidence remaining fragile, the pace of growth could remain uneven in the second half of the year.
