Latest data highlighted a general weakening of business conditions in the Japanese service sector. Activity contracted, while new orders growth slowed to a marginal pace. Subsequently, service sector providers reduced workforce numbers for the first time in eight months. Meanwhile, inflationary pressures eased, as input prices rose at a slower rate.
The headline seasonally adjusted Business Activity Index posted at 48.5 in February, down from 51.3 in January, thereby signalling worsening business conditions at Japanese services providers. Although only moderate, the rate of contraction was quicker than the average since the increase in the sales tax was implemented in April 2014.
Meanwhile, latest data highlighted an improvement in operating conditions in the Japanese manufacturing sector. The Composite Output Index posted at the 50.0 no-change mark in February, following a moderate rise in overall business activity in January.
February data signalled a slowdown in service sector incoming new orders, with the rate of growth easing to a weak rate. Furthermore, the vast majority of panellists (86%) noted no change in new business in comparison to the previous month. Meanwhile, new orders at Japanese goods producers rose for the ninth consecutive month in February, but the latest increase was the lowest in this sequence.
Reflecting the near stagnation in new business growth, volumes of unfinished work at Japanese services firms were unchanged in February, after rising in January at the quickest pace since May 2013. In contrast, pressure on capacity was evident at Japanese goods producers, as backlogs of work accumulated amid reports of higher production requirements.
Reports of weaker demand conditions and a decline in activitiy subsequently led service sector providers to cut their staff numbers for the first time since June 2014 in February. Although only fractional, the decline in employment levels was quicker than the long-run series average. Meanwhile, manufacturers continued to hire staff, although at a fractional pace.
Inflationary cost pressures eased at Japanese services companies in February, as input price inflation slowed to the weakest rate in 28 months. Where purchasing costs rose, panellists commented on a steep hike in raw material prices stemming from the deprecation of the yen. Meanwhile, service sector chargers rose fractionally in February, with the rate of charge inflation unchanged from January’s reading.
The negative side of the depreciation of the yen was still felt at Japanese manufacturers, as purchasing costs rose sharply due to a steep hike in raw material prices. Output charges, on the other hand, declined for the first time since August 2014, but at only a slight pace.
Despite reports of weak demand conditions, Japanese services firms remained positive in regards to activity over the next year, with business sentiment the strongest since September 2014. Firms linked optimism to expectations of stronger employment growth and an anticipated expansion in new business.