Japan services activity growth slows

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TOKYO- Japan’s services activity expanded at the slowest pace this year in October, a business survey showed on Monday, reinforcing concerns that the key sector propelling economic growth is continuing to soften.

The final au Jibun Bank Service purchasing managers’ index (PMI) fell to 51.6 in October from 53.8 in September, beset by weak demand.

The index was slightly above the flash reading of 51.1 and remained over the 50.0 threshold separating expansion from contraction, according to the survey compiled by S&P Global Intelligence.

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“While the PMI data continue to make positive reading for the Japanese service sector, the recent trends suggest that growth is on the wane,” said Andrew Harker, economics director at S&P Global.

Although consumption maintained its post-pandemic momentum, the rise in new orders was the weakest since January and new export orders slipped into the contraction for the first time in 14 months.

Employment returned to growth, but retirements offset the overall pace of job creation, the survey found. Business expectations, while optimistic, dipped to a nine-month low.

The worsening conflict in the Middle East and slower growth in China cloud the outlook for Japan, among the largest economies in the world. The government last week compiled a more than 17 trillion yen ($113 billion) package of measures to cushion the economic blow from inflation.

There was some positive news with inflationary pressures easing to a four-month low, even as fuel costs and wages rose.

The composite PMI, which combines the manufacturing and service activity figures, fell to 50.5 in October from 52.1 in September, staying above the break-even 50 mark for 10 months in a row.

Meanwhile, Bank of Japan Governor Kazuo Ueda said the country was making progress towards achieving the bank’s 2 percent  target but not enough to end ultra-loose policy just yet, warning of uncertainty on whether companies will keep rising wages enough next year.

The key considerations to whether Japan can sustainably achieve 2 percent  inflation is whether wages will keep rising next year and whether companies will start hiking prices on expectations that labor costs will continue to increase, he said.

“We’re seeing more positive signs than before in corporate wage and price-setting behavior. But there’s still uncertainty on whether the positive cycle (of inflation and wages) will strengthen, as we predict,” Ueda said in a speech to business leaders in Nagoya, central Japan, on Monday.

Japan’s economy is likely to continue recovering, but the outlook was “extremely uncertain” due largely to overseas risks such as the impact of aggressive US interest rate hikes on financial markets, and China’s weak growth momentum, he said.

Ueda said the BOJ was focusing on inflation-adjusted real borrowing costs, which remained in negative territory even as bond yields crept up.

“Inflation expectations have heightened moderately since last year. As such, real interest rates stayed in negative territory even as long-term rates rose,” Ueda said.

“We expect real interest rates to move in negative territory and keep monetary conditions sufficiently accommodative,” he said, signaling that the BOJ will tolerate a moderate rise in government bond yields.

The central bank maintained its ultra-easy monetary settings last week but further loosened its grip on long-term rates by tweaking its bond yield control policy, taking another step towards dismantling its controversial stimulus program.

The BOJ remains a dovish outlier amid a global wave of aggressive policy tightening by central banks on the view the recent cost-push inflation must be replaced by a largely demand-driven price rise before it can phase out stimulus.

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