Japan's service sector has demonstrated a steady upward trajectory into December, revealing a positive outlook for business conditions that extends through 2025. According to a recent report from S&P Global, service managers are not only expanding their payrolls but are also facing challenges from inflationary pressures that are impacting operational costs. In December, the purchasing managers index (PMI) for Japan's service sector recorded a value of 50.9, up from 50.5 in the previous month.
This figure comfortably rests above the pivotal 50-mark, which delineates economic expansion from contraction. The report highlights that the service sector has enjoyed growth in five of the last six months, driven by an increase in demand and subsequent business expansions. The demand surge in December was such that it outstripped the managers’ ability to supply, leading to an accumulation of backlogs.
As new client inquiries surged, the constraint on productive capacity became evident, resulting in a second consecutive month of rising outstanding business. Additionally, inflationary trends were notable in December, with managers reporting higher costs for raw materials and wages. To mitigate these pressures, many firms have chosen to pass a portion of these costs onto clients, resulting in a marked increase in the prices charged for services. The service sectors included in the PMI report encompass a wide array of areas such as consumer services (excluding retail), transport, information, communication, finance, insurance, real estate, and business services.
In a related observation, the composite PMI for Japan, which fuses insights from both manufacturing and service sectors, likewise saw a modest increase in December, bolstered by the resilience in services. The composite PMI rose to 50.5 from 50.1 in November, indicating that while the services economy experienced mild growth, manufacturing output faced a gentler contraction. Overall, the trends observed highlight a dynamic service sector in Japan, adeptly navigating challenges brought on by inflation while remaining optimistic about future business prospects..