Japan service sector activity slows down

The moderation in Japan's service sector expansion in September, while still indicating growth above the 50-mark, points to a nuanced economic environment. The slower pace of increase in business activity and new orders, as reported by S&P Global, suggests that some momentum from August has dissipated. This slowdown was partly attributed to earthquake disruption, highlighting how unexpected events can directly affect economic performance.

A notable distinction in the report is between domestic and export demand. While stronger domestic demand continued to support sales, new export business declined for the second-sharpest rate since January 2021. This indicates that the sector's growth is predominantly driven by internal consumption, with external markets posing a significant drag.

Despite the overall easing of growth, the service sector showed signs of underlying strength in employment and capacity planning. Employment increased for the 13th consecutive month, at the fastest rate since February, and companies reported the strongest rise in backlogs of work in seven months. This suggests that businesses are investing in their workforce and expanding capacity, potentially anticipating future demand even as input cost inflation, though easing, remains historically high.