Japan’s services sector continued to expand in July, although the pace of growth weakened as demand slowed and businesses faced intense cost pressures.
The latest S&P Global survey also showed that service providers raised their selling prices at the fastest rate since April 2014.
Japan Services PMI Falls in July
The final Japan Services Purchasing Managers’ Index fell to 51.2 in July from 52.2 in June.
The result was also below the preliminary reading of 51.9.
A PMI reading above 50 indicates expansion, while a figure below 50 signals contraction.
Although the sector remained in growth territory for a second consecutive month, the rate of expansion was much weaker than during the earlier months of 2026.
New Business Growth Hits Two-Year Low
Growth in new business slowed to its weakest level in two years.
The decline suggests that demand for Japanese services is losing momentum, both at home and abroad.
Foreign demand also fell for a fourth consecutive month. However, the pace of contraction was softer than in May and June.
This indicates that overseas conditions remained challenging, even though the downturn became less severe.
Cost Pressures Remain Elevated
Input costs continued to rise sharply in July.
The rate of inflation was only slightly below the four-year high recorded in June.
Survey respondents pointed to several factors behind the increase. These included the conflict in the Middle East, higher staff expenses and the weakness of the Japanese yen.
A weaker yen raises the cost of imported goods and energy, making it more expensive for businesses to operate.
Selling Prices Rise at Fastest Pace Since 2014
Japanese service providers increased their prices at the fastest rate since April 2014.
That earlier period followed an increase in Japan’s consumption tax, which triggered widespread retail price rises.
In July, companies raised prices to pass higher costs on to customers and protect their profit margins.
The sharp increase in selling prices may contribute to broader inflation across the Japanese economy.
Capacity Pressures Begin to Ease
Backlogs of unfinished work continued to increase, but at the slowest pace in 17 months.
This suggests that pressure on business capacity is beginning to ease.
Employment growth also slowed compared with June. At the same time, business confidence weakened as firms became more cautious about future demand.
Companies still expect activity to expand, but optimism has declined.
Manufacturing Growth Supports Composite PMI
Japan’s broader Composite PMI remained relatively stable in July.
The index, which combines activity in the manufacturing and services sectors, slipped slightly to 52.7 from 52.8 in June.
A strong increase in factory output helped offset the slowdown in services.
Manufacturing production rose to its highest level since early 2014, highlighting a clear difference between the two major parts of the economy.
Inflation Could Increase Pressure on the Bank of Japan
Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said cost inflation remained high across both manufacturing and services.
She noted that businesses faced growing pressure to raise their own prices to protect margins.
Persistent price increases could push Japan’s official inflation measures higher.
This may place additional pressure on the Bank of Japan to raise interest rates in the coming months.
Japan’s Services Sector Faces a Difficult Balance
The July PMI report showed that Japan’s services sector remained in expansion, but momentum weakened.
Slower demand, falling overseas business and softer confidence pointed to growing caution among companies.
At the same time, high input costs and rising selling prices increased concerns about inflation.
The Bank of Japan will likely monitor future PMI data, wage growth and consumer prices closely before making its next policy decision.
