Japan’s services sector shrinks for first time in almost two years

What is going on here?

Japan’s services sector fell into recession in June 2024, with Au Jibun Bank’s final services PMI falling to 49.4 from 53.8 in May, snapping a 21-month streak of uninterrupted growth.

What does it mean?

Japan’s services PMI fell below the 50.0 threshold, which indicates a recession, for the first time since August 2022. Trevor Balchin of S&P Global Market Intelligence noted that the decline represents a halt in growth rather than a sharp drop in demand. Consumer services, finance and insurance, real estate and business services all saw reduced demand, while the transportation, storage and information and communications sectors all saw gains. The weakened yen, which has fallen more than 12% this year, has boosted overseas demand for Japanese services. Despite these challenges, employment and business confidence remained strong. However, rising wages, food and fuel costs — driven by a weaker yen — have boosted input prices, leading to the fastest pace of growth inflation since August last year. The PMI, which reflects both manufacturing and services activity, also fell to 49.7 from 52.6, ending a seven-month streak of above-growth activity.

Why should I care?

For markets: Rising costs and currency problems.

The decline in Japan’s services sector reflects broader economic pressures, such as rising input costs and a significantly weakened yen. Firms have been forced to pass on these costs to consumers, illustrating a challenging inflation environment. Investors should closely monitor how these factors impact corporate earnings and overall market sentiment in Japan.

Bigger picture: A diverse economic landscape.

Japan’s economic health is sending mixed signals: while service activity has contracted, sectors like transportation and information services are growing, and employment remains stable. The impact of the yen’s depreciation underscores global economic interdependencies. These fluctuations could affect Japan’s economic policies and have cascading effects on global trade and investment strategies.