Japan’s services sector remains in expansion but is losing a little momentum, with weaker demand growth, rising energy-driven costs, and sharply lower business confidence signalling a more uncertain outlook.
Summary:
- Japan Services PMI eases to 53.4 (prev 53.8), still solid expansion
- New orders growth slows to a three-month low
- Cost pressures intensify, driven by energy and Middle East conflict
- Selling price inflation remains elevated but eases from peak
- Business confidence drops to lowest since pandemic
- Employment growth softens amid weaker demand momentum
- Composite PMI also slows, confirming broader moderation
Japan’s service sector continued to expand in March, though momentum showed early signs of softening as rising cost pressures and geopolitical uncertainty weighed on sentiment.
The S&P Global Japan Services PMI edged down to 53.4 from February’s 21-month high of 53.8, signalling a slower but still solid pace of growth. Activity has now increased for twelve consecutive months, supported by steady demand and improving customer numbers, with finance and insurance leading gains across sub-sectors.
However, the underlying tone of the report pointed to a moderation in forward momentum. Growth in new orders slowed to a three-month low, with firms reporting only modest increases in business volumes. While domestic demand remained resilient, the pace of expansion has cooled from earlier highs. Export orders also rose, but at a mild rate despite being one of the stronger readings in recent months.
At the same time, cost pressures intensified notably. Firms recorded the sharpest rise in input prices in nearly a year, with respondents widely citing higher energy, fuel and raw material costs. The escalation of conflict in the Middle East was specifically highlighted as a key driver of these price increases, reinforcing the global transmission of energy shocks into domestic inflation dynamics.
Although companies continued to pass on higher costs, the pace of output price inflation eased slightly from February’s multi-year peak, suggesting some limits to pricing power.
Labour market conditions also showed signs of caution. Employment continued to rise, but at a slower pace, while backlog accumulation softened, indicating less pressure on capacity.
Most notably, business confidence deteriorated sharply, falling to its lowest level since the pandemic. Firms cited heightened uncertainty linked to the Middle East conflict and its implications for global demand and inflation, underscoring a more fragile outlook despite ongoing expansion.
