January PMI data signalled a positive rise in overall business conditions in the Japanese service sector, with business activity rising at a sustained rate supported by a return to new business growth. Subsequently, backlogs of work accumulated, reversing the trend observed in the previous month. Meanwhile, employment remained in growth territory, albeit at a weak rate. Cost pressures persisted, with input prices rising, albeit at a slower rate.
The headline seasonally adjusted Business Activity Index posted at 51.3 in January, slightly down from 51.7 in December but nonetheless signalling a moderate increase in activity at Japanese services providers. Panellists commented on gains in new business from both the domestic and international markets. Furthermore, business activity has now risen for three successive surveys, marking the longest period of expansion in the past year.
Meanwhile, January data signalled a solid improvement in operating conditions in the Japanese manufacturing sector. The Composite Output Index posted at 51.7 in January, little changed from 51.9 in December and signalling a moderate rise in overall business activity.
Higher activity was supported by a return to new orders growth at the start of 2015. Although moderate, the latest rate of expansion posted above the average since the sales tax increase was implemented last April. Meanwhile, new work at Japanese manufacturers rose for the eighth month running, with the rate of expansion ticking up from the previous survey period to a three-month high.
Pressure on capacity was evident at Japanese services companies in January, as backlogs of work accumulated alongside the return to new orders growth. In contrast, volumes of unfinished work at manufacturers were unchanged, following a previous two-month period of readings signaling declines.
Payroll numbers at Japanese services providers continued to rise, extending the current period of staff recruitment to seven months. Service sector firms linked the hiring of staff to improved business conditions. Employment growth remained weak, however, with the vast majority of panellists noting no change in comparison to the previous survey period. Meanwhile, manufacturers continued to hire staff, although at a slightly slower pace than the previous month.
Inflationary pressures persisted at Japanese services firms in January, as signalled by a rise in input prices. According to panellists, an increase in raw material and wage costs were the main drivers behind the rise in purchasing prices. However, the rate of inflation slowed to the weakest in just under a year-and-a-half. Meanwhile, selling prices increased as several Japanese services firms passed on higher cost burdens onto their clients. The rise in charges was fractional, however.
Price pressures were also felt in the manufacturing sector, as both input and output prices increased. Firms linked the inflationary pressures to the depreciation of the yen driving up raw material prices.
Finally, service sector expectations regarding future activity remained positive at the start of 2015, with the degree of sentiment little-changed from December. Firms linked optimism to the start up of new projects and an anticipated expansion in new business.