Business activity in Japan's service sector worsened from a previous month of growth in August, although at a fractional pace.
Total new orders, however, remained in growth territory for the third month in a row. Companies continued to expand their workforce numbers over the month, but at a slight pace. Growth in payroll numbers supported a reduction of work-in-hand for the third consecutive month.
The Japan Business Activity Index posted a reading below the neutral 50 mark that separates expansion from contraction in August, signalling a deterioration in services output. However, at 49.9, the index posted close to the 50 no-change mark indicating only a fractional decrease in activity.
Japanese manufacturing business conditions improved during August, with both output and new orders rising at the fastest pace since before the sales tax increase was implemented in April. Some surveyed companies attributed improved conditions to the dissipation of the negative effects caused by the increase in the sales tax implemented in April.
The Composite Output Index overall signalled a slight improvement in business activity with the index posting at 50.8 up from 50.2 in July.
Higher manufacturing production was largely reflective of increased new orders, according to panellists. Moreover, the rate of expansion was sharp and the highest since March.
Average input costs at Japanese services providers continued to increase in August, as has been the case since November 2012. Moreover, the rate of input price inflation accelerated for the second successive month and was the strongest since April. Panellists reported that a steep hike in raw material costs, wages and the rise in sales tax had led to higher operating costs.
Consequently, service sector firms increased their average selling prices for the seventh straight month in August. That said, the rate of inflation eased from the previous month to the weakest since before the sales tax was implemented at the start of April.
Job creation was recorded for the thirteenth month running at Japanese manufacturers, with the pace broadly in-line with the previous two months. Unfinished business fell for Japan services companies in August, albeit at a marginal rate.
Reduced levels of work-in-hand could in part be explained by a further rise in staffing levels in August. Meanwhile, backlogs of work for manufacturers rose for the first time in five months in August.
Finally, Japanese service providers were optimistic with regards to the 12-month business outlook in August, with panellists commenting on the development and expansion of new services. However, the degree of positive sentiment slipped from July’s ten-month high and was the lowest since March.
Amy Brownbill, economist at Markit said, "Latest PMI data indicated a fall in business activity for Japanese services, although at only a slight pace. New business growth, on the other hand, was sustained for a third month in a row. Furthermore, job creation remained in growth territory amid reports of planned company expansions."
"Therefore, it would seem that the performance of the Japanese service sector will return to positive growth in the near future as the negative effects of the sales tax increase dissipate."