Japan Services PMI Slows in December as Rising Costs Weigh on Demand

Japan’s service sector continued to expand in December but at its slowest pace since May, reflecting softer domestic demand despite a rebound in overseas business, according to a private sector survey released on Wednesday. The latest data highlights the growing pressure that rising costs are placing on Japanese companies, even as confidence about the year ahead remains resilient.

The final S&P Global Japan Services Purchasing Managers’ Index (PMI) declined to 51.6 in December from 53.2 in November. This reading was below the earlier flash estimate of 52.5 but stayed above the critical 50.0 threshold that separates expansion from contraction, marking the ninth consecutive month of growth in the services sector. A reading above 50 indicates that business activity is still improving, though at a more moderate pace.

The survey showed that while foreign demand for Japanese services returned to growth for the first time since June, overall new orders increased more slowly. Softer domestic demand offset the recovery in new export business, signaling a more cautious environment for service providers as consumers and clients remain sensitive to higher prices.

Cost pressures intensified notably in December. Input costs rose at the fastest rate since May, driven by higher prices for raw materials, labor, fuel, and construction. These rising expenses led companies to raise their output charges significantly in an effort to protect profit margins. According to S&P Global Market Intelligence, businesses face the challenge of passing on higher costs without undermining their competitiveness or weakening sales momentum.

Despite these challenges, employment in Japan’s service sector showed a positive trend. Staff numbers increased at the fastest pace in more than two-and-a-half years, supported by improved sales conditions and the filling of long-standing job vacancies. This suggests that companies remain optimistic enough about future demand to continue hiring.

Looking ahead, business confidence over the next 12 months remained strong. Firms expressed optimism that new product launches, store openings, and stronger demand—particularly in the transport and information technology sectors—would support growth. Meanwhile, the final S&P Global Japan Composite PMI, which includes both manufacturing and services, eased to 51.1 in December from 52.0 in November, reflecting the softer services performance even as manufacturing output showed signs of stabilization.