Japan’s service sector has shown signs of economic resilience as it expanded for the second consecutive month in December 2024. According to a private-sector survey released on Monday by au Jibun Bank and S&P Global Market Intelligence, the Service Purchasing Managers’ Index (PMI) increased to 50.9 in December from 50.5 in November, indicating continued growth. Despite a slight dip from the flash reading of 51.4, this marks a sustained period of expansion in the Japanese services industry.
Strong Demand and Business Expansion Drive Growth
The PMI for Japan’s service sector is a key indicator that measures the overall economic health of the industry, with a reading above 50 indicating expansion and below 50 signaling contraction. The December figure of 50.9 reflects solid demand and business expansion, which have contributed to the ongoing growth.
“December data revealed a positive month for the Japanese service sector, with sustained rises in both business activity and new business,” said Usamah Bhatti, economist at S&P Global Market Intelligence. This growth comes after November’s PMI reading of 50.5, which was also above the critical 50.0 threshold.
A significant factor driving this expansion is the increase in new business. The survey revealed that the new business subindex rose for a sixth consecutive month in December, reaching its highest level in four months. Notably, the growth was largely driven by strong customer acquisition within the domestic market. This is a positive sign for businesses looking to expand their reach and secure new clients in the competitive service industry.
Employment and Business Sentiment Continue to Show Positive Signs
Employment within Japan’s service sector also continued to grow in December, marking the 15th consecutive month of job creation. However, the rate of job growth slowed slightly compared to November, as businesses adjusted their hiring strategies in line with their expansion plans. Despite the slowdown in the pace of hiring, businesses remain optimistic about the future and are continuing to recruit to meet increasing demand.
Business sentiment remained positive in December, though the level of optimism softened slightly from November. Firms are generally hopeful that demand and business activity will continue to rise in the coming months. This reflects a steady confidence in the overall economic recovery and prospects for sustained growth in the service sector.
Inflationary Pressures Persist Amid Rising Costs
Although the service sector showed growth in December, inflationary pressures remain a concern. The survey revealed that the rate of inflation remained unchanged in December, driven primarily by higher labor and raw material costs. These rising costs have led to an increase in the prices that businesses charge their customers, though the rate of price increases remained consistent with the previous month.
The persistence of inflationary pressures comes at a time when the Bank of Japan (BOJ) is closely monitoring economic conditions. The BOJ has been engaged in a prolonged period of ultra-loose monetary policy, but recent data, including higher inflation, has bolstered expectations of a potential rate hike in the future. This could signal a shift in the central bank’s approach to stimulating the economy and managing inflation.
Composite PMI Indicates Overall Economic Growth
In addition to the service sector PMI, the composite PMI, which combines both manufacturing and service activity, also showed positive growth. The composite PMI increased to 50.5 in December, up from 50.1 in November, indicating that Japan’s economy continued to expand in the final month of 2024. The composite PMI reflects the overall economic performance, suggesting that Japan’s recovery is becoming more broad-based, with both the service and manufacturing sectors contributing to growth.
Impact on Bank of Japan’s Policy Outlook
The data from the December PMI survey is significant for the Bank of Japan (BOJ) as it could influence future policy decisions. In particular, the continued rise in service-sector inflation, combined with the overall growth in the economy, is likely to increase speculation that the BOJ will raise interest rates in the near future.
BOJ Governor Kazuo Ueda has previously stated that the bank must carefully monitor global economic conditions, especially U.S. policy, as it prepares for future policy changes. The BOJ’s next policy meeting is scheduled for January 23-24, 2025, and investors will be closely watching for any signals about a possible interest rate hike.
The possibility of a rate increase comes after Japan’s long-running ultra-loose monetary policy, which has supported the economy during the pandemic recovery phase but may now be less appropriate given the signs of inflationary pressure. A rate hike, if implemented, would be a significant shift in the BOJ’s policy, which has maintained negative interest rates for years in an effort to boost economic activity.
Outlook for Japan’s Service Sector in 2025
Looking ahead, Japan’s service sector faces both challenges and opportunities. On the one hand, continued inflationary pressures could pose risks to businesses, particularly those reliant on labor and raw material costs. On the other hand, the ongoing expansion in new business and steady demand for services suggests that the sector could remain resilient in 2025.
Moreover, the optimism seen in business sentiment, along with strong customer acquisition, points to a potential for further growth in the year ahead. The key to sustaining this momentum will be how businesses manage rising costs and how the Bank of Japan navigates its monetary policy to support ongoing economic recovery.
Conclusion: Positive Momentum in Japan’s Service Sector
Japan’s service sector has shown encouraging signs of growth, with key metrics such as business activity, new business, and employment all demonstrating positive trends in December 2024. While inflationary pressures remain a concern, the overall outlook for the service sector is one of cautious optimism. The Bank of Japan’s policy decisions in the coming months will be pivotal in shaping the trajectory of Japan’s economy and its service sector.
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