On Tuesday, Japan's August service sector Purchasing Managers' Index (PMI) final figure rose from 53.8 in July to 54.3, marking the 12th consecutive month above the boom-bust line of 50. The index that measures backlogs of work rebounded to above 50.0 in August. Data indicates that bolstered by inbound tourism activity, Japan's service sector not only expanded at the fastest pace in three months but also contrasted sharply with the shrinking manufacturing activity and the gloom in business confidence.
S&P Global Market Intelligence economist Usamah Bhatti remarked that Japan's service companies saw a significant improvement in new orders, supporting the accelerated growth of business activity. Service providers' signals of steeply increasing inflation pressures highlight the broader price pressures faced by Japan's business sector.
Respondents noted that due to the increase in inbound tourists, customer numbers, and demand for goods and services, service providers are inclined to hire more staff to meet the flourishing demand for goods and services. Data shows that the number of visitors to Japan in July reached 2.32 million, the highest level since the pandemic began.
However, impacted by the surge in demand for goods and services and the accelerated growth of business activity, Japanese household spending experienced its largest drop in over two and a half years. Official data released on Tuesday showed that Japan's household spending in July decreased by 5.0% year-over-year, surpassing the market’s expected median decline of 2.5% and marking the fifth consecutive month of decline. Seasonally adjusted household spending fell by 2.7% month-over-month, against expectations of a 0.5% increase.
An official from Japan's Ministry of Internal Affairs and Communications mentioned that, although the lifting of pandemic control measures has increased outings, boosting spending in dining, transportation, culture, and entertainment services, the broad rise in prices led to decreased spending in many areas, especially in housing and automobiles, where prices are more volatile.
Japan's core consumer price index (CPI), excluding fresh food but including petroleum products, followed a 3.3% increase in July with another rise of 3.1% in August, marking the 16th consecutive month the index has been above the Bank of Japan's inflation target of 2%.
Economist Masato Koike of Sompo Institute Plus expects that with further wage growth and normalization of economic activities, private consumption will continue to recover. This view is supported by a private survey showing Japan's service sector activity expanding at the fastest pace in three months in August.
