Japan's services PMI slips to 51.3 as employment rises and cost pressures remain high

The data suggests a hawkish tilt for the BOJ even as headline growth slowed. Output price increases are close to record levels, rising payrolls and growing backlogs point to capacity pressure that bolsters the case for another hike. S&P Global explicitly notes that October is a potential timing for a move, which could solidify market pricing for a near-term adjustment. This is positive for the yen and adds upward pressure on short-term JGB yields. Oil was listed among the cost drivers, meaning the energy shock from the Middle East is directly feeding into Japanese service prices, reinforcing the inflation narrative. Weak export demand and earthquake disruption are the main soft spots that could make the BOJ cautious.

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Earlier report:

• Uchida of the Bank of Japan says AI is a large demand shock boosting prices, and warns of correction risk

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Japan's services sector is expanding at a slower pace, but increases in pay, employment and prices provide the central bank with ample justification to continue rate increases.

Key details:

• The S&P Global Japan Services PMI declined to 51.3 in September, down from 52.5 which was a five-month peak, marking a fourth consecutive month of expansion.
• New orders increased at a more modest pace, buoyed by domestic demand, while export orders fell sharply. The Kumamoto earthquake caused some disruption.
• Employment increased at the fastest pace since February, and backlogs expanded at the steepest rate in seven months. Business optimism reached its highest since June.
• Input cost inflation slowed to a six-month low but remained strong. Output prices rose at one of the fastest rates ever recorded.
• The composite index dropped to 52.3 from 53.5. S&P Global indicated the BOJ could implement another hike, possibly in October.

Japan's services sector growth moderated in September yet remained in expansionary territory, based on the S&P Global Japan Services PMI published on Monday. Employment increased and price pressures stayed high, with S&P Global saying the figures could back another BOJ rate increase, potentially as early as this month.

The Services Business Activity Index declined to 51.3, down from 52.5 in August, which was a five-month high. It stayed above the 50 mark that divides expansion from contraction for a fourth month in a row. The growth rate was moderate and under the year-to-date average. New orders also grew at a slower pace, buoyed by domestic demand, while new export orders continued to drop sharply. Some companies indicated weaker-than-anticipated customer demand, and the Kumamoto earthquake hampered activity in certain regions.

Hiring stood out as a positive feature. Service firms increased their workforce for the 13th straight month and at the quickest rate since February, while outstanding work expanded at the sharpest pace in seven months. Sentiment regarding the next 12 months improved to its strongest since June.

Input price inflation softened to a six-month low but was still intense, as companies pointed to increased expenses for raw materials, labor, oil and food. The prices that service businesses charge climbed at one of the fastest rates ever seen in the survey.

The Composite Output Index, which includes both manufacturing and services, fell to 52.3 from 53.5. This represented an 18th consecutive month of expansion, though the weakest rate since May.

According to S&P Global, swift cost and price rises throughout the economy indicate additional upward pressure on consumer inflation, which was 1.9% in August, slightly under the BOJ's 2% goal. The firm partly attributed these increases to the Middle East conflict and the yen's weakness. Combined with fairly robust growth, S&P Global said, this points to the possibility of another rate hike by the central bank, potentially at its October meeting.