Japan's services activity picks up to 51.7 while composite PMI hits five-month low

Both factions in the Bank of Japan's rate debate can find support in the latest figures. Cost increases that are unusually strong by past standards make the argument for additional hikes, whereas reduced hiring and dimmer confidence provide the cautious camp with something to cite. Taken as a whole, the survey probably will not substantially alter market pricing for December; the yen therefore looks more responsive to the BoJ minutes and to inflation signals linked to oil. The fact that companies mention inflation as hurting confidence shows how Middle East energy costs are making their way into Japanese business sentiment. Overseas orders are soft, so external demand is unlikely to provide much help.

Earlier:

• BoJ minutes: further rate increases endorsed by board, 50% oil surge flagged, government urged caution

Japanese service companies continue to post growth and continue to pay higher costs, yet they are cutting back recruitment and their outlook has worsened.

Summary:

• The services PMI advanced to 51.7 in October from 51.3, stretching the growth streak to five months on domestic demand.
• Composite PMI declined to 52.1 from 52.3, hitting a five-month low with factory-sector growth weaker.
• Service-sector employment rose at the weakest rate in 14 months, while private-sector job creation fell to a one-year low.
• Input-cost inflation slowed to an eight-month low while remaining well above its long-run average.
• Service-sector confidence dropped to its lowest since March, with inflation, population ageing and labour shortages blamed.
• The pace of growth and cost pressures are what the BoJ will weigh in tightening choices, according to S&P Global.

October brought a touch more growth in Japanese services, according to S&P Global's newest survey, but the broader private-sector economy expanded at its slowest pace in five months as factories lost momentum. Cost pressures, while less intense, remained sharp enough to keep the Bank of Japan focused on inflation.

S&P Global's Japan services PMI reached 51.7 in October, up from 51.3 the previous month and the fifth consecutive reading above 50. Surveyed businesses put the improvement down to larger volumes of fresh orders and a drive to win a wider customer base; even so, the pace of expansion was still modest and beneath the year-to-date average.

There was a small uptick in new orders as well, helped by more solid demand at home. New export business contracted for another month, but the rate of decline was the least pronounced in six months.

Employment was the area of concern. Payroll numbers in services moved up just barely, the most subdued outcome in the sector's 14-month streak of job growth; a number of companies pointed to departures through resignations and retirements. Since capacity remained under strain, outstanding workloads expanded once more.

Inflationary pressure has eased but is still running high. Input-cost inflation slowed to an eight-month low and the increase in output prices also moderated, with both remaining comfortably above their long-run averages. Expectations for the year ahead turned less confident than at any point since March, with firms citing inflation, an ageing population and labour shortages.

Elsewhere in the economy, conditions looked less robust. Between the two sectors, the composite PMI fell to 52.1 in October from 52.3 -- a five-month low -- and has now posted 19 consecutive months of expansion. The faster services expansion was neutralised by a less pronounced increase in factory production. Headcount growth across the private sector slowed to a one-year low, and business optimism dropped to a three-month low. Input prices were still climbing at a rate that is historically sharp, although the pace of the increase in selling prices was at a four-month low.

S&P Global observed that input costs and selling prices, although climbing at a slower rate, still showed gains brisk enough to suggest official consumer inflation could stay elevated in the coming months. Whether output momentum fades further and whether cost pressures subside will be important inputs for the BoJ's deliberations on more tightening, the firm continued, cautioning that high inflation was eating into confidence and could also restrain demand and recruitment.

The data were published on the same day as the BoJ's September meeting minutes, which recorded agreement among policymakers that further rate increases would be needed. That keeps attention on whether the central bank raises rates again in December.