Japan's service sector growth moderated in August, with domestic demand remaining robust even as companies cut staffing levels for the first time in nearly two years, a private sector survey showed on Wednesday.
The S&P Global final Japan Services purchasing managers' index (PMI) slipped to 53.1 in August from 53.6 in July, remaining above the 50.0 threshold that indicates expansion.
The reading was higher than the flash estimate of 52.7 but marked a slower pace compared to the prior month.
Solid growth in new business underpinned the sector's performance, with total new orders rising at the fastest rate since February despite foreign demand contracting at its sharpest pace in more than three years.
"Growth momentum remained strong across Japan's service sector in August," said Annabel Fiddes, economics associate director at S&P Global Market Intelligence.
"However, the data also suggests that the upturn was largely driven by stronger domestic demand, as new export business declined again."
Employment in the sector fell slightly for the first time since September 2023, with firms citing staff resignations. The decline, coupled with rising workloads, led to the steepest increase in backlogs in over two years, the survey found.
Input costs surged, with inflation accelerating from a 17-month low in July. Competitive pressures, however, limited the ability of firms to significantly raise prices, squeezing operating margins.
Service firms expressed improved business confidence for the year ahead, citing planned company expansions and expectations of stronger customer demand domestically and overseas.
The resilient service sector helped offset weakness in the manufacturing sector, boosting overall business activity.
Japan's composite PMI, which combines manufacturing and services, rose to 52.0 in August from 51.6 in July, marking the strongest overall business activity growth since February.
