Business conditions in the Japanese service sector improved in June. Activity increased at the fastest rate since September last year, alongside a sharper rise in new orders. Subsequently, prospects towards activity over the coming year strengthened. Employment levels, on the other hand, declined for the first time in three months, albeit fractionally. Meanwhile, cost burdens were evident, as input costs increased and at the fastest rate this year so far.
At 51.8 in June, up from 51.5 in May, the seasonally adjusted Nikkei Business Activity Index signalled further positive improvements in business conditions at Japanese services companies. Business activity has increased in every month during the second quarter of the year. Furthermore, the latest reading was the highest since September last year. According to respondents, an improvement in economic conditions and a rise in sales volumes led to the latest expansion.
Meanwhile, the rate of improvement in operating conditions at Japanese goods producers weakened in June. That said, the Nikkei Composite Output Index indicated a sustained expansion in overall activity by posting at 51.5 in June, which was in line with the average over the past two years. New business at service sector providers rose for the third consecutive month in June. Moreover, the rate of growth reached a seven-month high and was solid overall. Panellists mentioned a rise in international clients and an improvement in the domestic economy leading to an increase in new work intakes. In contrast, manufacturers reported a contraction in new orders.
Meanwhile, pressure on capacity was evident at Japanese services firms, as backlogs of work accumulated, in line with further increases in both activity and new orders. Moreover, the rate of accumulation picked up from the prior month and was faster than the average seen in the first half of this year.
Despite reports of improving business conditions, service sector providers reduced their staffing levels in June for the first time in three survey periods. However, the rate of job shedding was only fractional. In contrast, employment levels in the manufacturing sector remained in modest growth territory.
On the price front, inflationary pressures persisted at Japanese services companies, as input prices rose and at the fastest rate since December 2014. According to respondents, increases in both raw material costs and staff wages led to the latest rise in purchasing prices. Meanwhile, service sector charges rose at the quickest rate in seven months, as companies tried to reduce their cost burdens. Similarly, manufacturing purchasing costs rose, albeit at the second weakest pace in the 30-month period of inflation, while charges rose at the fastest rate since January.
Finally, business sentiment was in line with the average seen so far in 2015, having strengthened from May’s 14-month low. Expectations of an economic recovery, development of new products and an anticipated rise in sales volumes were cited as key reasons behind the optimism.