Service industry contraction + accelerated inflation pose a double blow to the Japanese economy
Japan's economy is facing a double blow, with the service industry shrinking and inflation accelerating. In June, both the manufacturing and service sectors in Japan showed signs of slowing down, with the service industry experiencing contraction for the first time in nearly two years, mainly due to the pressure of rising costs. Inflation is also accelerating, with the national core CPI rising by 2.5% year-on-year in May, slightly lower than expected but reaching or exceeding the Bank of Japan's 2% target for the 26th consecutive month. The slowdown in service sector inflation may be affecting overall price levels, providing support for the Bank of Japan to consider raising interest rates. Despite the pressure on Japan's economy, the road to economic recovery is not smooth sailing
According to Zhitong Finance and Economics APP, in June, both the manufacturing and service sectors in Japan showed signs of slowing down, with the service sector experiencing its first contraction in nearly two years, mainly due to the pressure of rising costs. A report from S&P Global showed that in June, Japan's Jibun Services PMI fell from 53.8 to 49.8, dropping below the 50 threshold for the first time since August 2022, while the Manufacturing PMI also slightly declined to 50.1, with the Composite PMI remaining on the edge at 50.
Pan Jingyi, Deputy Director of Economic Intelligence at S&P Global Market Intelligence, pointed out in a press release that service companies faced setbacks in recruiting new employees and saw their profit margins eroded as they struggled to pass on the continuously rising costs to consumers. This indicates that despite businesses attempting to cope with cost pressures by raising prices, weak market demand limits their pricing power.
It is worth noting that inflation in Japan is also accelerating. In May, the national core CPI rose by 2.5% year-on-year, slightly below expectations but marking the 26th consecutive month that it has reached or exceeded the Bank of Japan's 2% target. The significant increase in electricity prices has been a key driver of inflation. Additionally, the Producer Price Index in May also showed the fastest increase in nine months, which could further push up consumer prices.
These data provide support for the Bank of Japan to consider raising interest rates in the coming months. The Bank of Japan has hinted at announcing details of reducing bond purchases next month. However, despite the acceleration in inflation, the year-on-year growth rate of the national core CPI in May actually slowed compared to April, indicating that the slowdown in service sector inflation may be affecting overall price levels. The Bank of Japan has always viewed service sector inflation as a key factor in policy deliberations, and after slowing to 1.7% in April, this indicator further dropped to 1.6% in May.
While Japan's economy faces dual pressures of rising costs and accelerating inflation, the slowdown in the service sector and the restraint on consumer spending also suggest that the path to economic recovery is not smooth sailing