Japan’s service sector continued to expand in December, but growth moderated as the year came to an end, according to the latest S&P Global Japan Services PMI survey.
The headline Services Business Activity Index slipped to 51.6 in December from 53.2 in November. This marked the slowest pace of expansion since May, while still keeping activity above the 50 level that separates growth from contraction. The sector has now remained in expansion territory for nine consecutive months.
Demand growth softens toward year-end
New business volumes continued to rise in late 2025, although at a more subdued rate. Some companies reported stronger customer traffic and fresh projects, while others pointed to softer overall demand conditions. Overseas demand for Japanese services edged higher, marking its first increase since June.
Hiring accelerates despite rising capacity pressures
Employment in the service sector increased at the fastest pace since May 2023. Firms cited higher sales and the need to fill long-standing vacancies as key drivers behind the rise in hiring.
Stronger job creation coincided with mounting capacity pressures. Backlogs of work grew at their quickest rate in three months, suggesting that demand continued to test operational limits despite slower headline growth.
Cost pressures push prices higher
Input cost inflation intensified in December. Businesses reported rising expenses for raw materials, labor, equipment, fuel, and construction-related items. The pace of cost increases was the sharpest since May and remained well above the long-term average.
In response, service providers raised their selling prices at one of the strongest rates seen in the survey’s history.
Among service industries, the Finance and Insurance sector led overall growth, posting the largest increase in business activity across the five tracked sub-sectors.
Composite PMI points to broader slowdown
The broader S&P Global Japan Composite PMI Output Index, which combines manufacturing and services, fell to 51.1 in December from 52.0 in November. This signaled the slowest rate of overall economic expansion in seven months.
Manufacturing output, however, showed signs of stabilization after five consecutive months of contraction.
Despite the late-year slowdown, service firms remained optimistic about the outlook for 2026. Companies expect new product launches, additional store openings, and improving client demand to support stronger sales and business activity over the year ahead.
