Japan's service industry continues to expand, providing support for the Bank of Japan's interest rate hike in January
Japan's service sector activity expanded for the second consecutive month in December, with the PMI rising from 50.5 to 50.9, indicating continued growth in business activity and new orders. Although business confidence has slightly weakened, there is an optimistic outlook for future demand. High inflation and rising costs may prompt the Bank of Japan to raise interest rates in January, with the market expecting a 25 basis point hike before May. Bank of Japan Governor Kazuo Ueda stated that attention should be paid to overseas conditions, particularly the impact of Trump's policies
According to Zhitong Finance APP, driven by strong demand and corporate expansion, Japan's service sector activity expanded for the second consecutive month in December. According to a survey compiled by S&P Global Market Intelligence, the final value of Japan's service sector PMI rose from 50.5 in November to 50.9 in December, although it was below the preliminary value of 51.4, it remained above the neutral line of 50 for the second month in a row.
S&P Global Market Intelligence economist Usamah Bhatti stated, "The data for December shows that Japan's service sector performed well, with business activity and new business continuing to grow."
The survey indicated that in December, the new business classification index rose for the sixth consecutive month, mainly driven by an increase in new clients, particularly from the domestic market in Japan.
Employment numbers increased for the 15th consecutive month, although the growth rate slowed compared to November. Surveyed companies reported that they hired more employees based on their business expansion plans.
Business confidence remained positive in December, but the level of optimism was slightly weaker than in November. Participating companies expressed hope for demand and activity growth in the coming year.
Inflation in December remained high, primarily due to rising labor and raw material costs. Companies passed on the higher cost burden to customers, although the pace of price changes in December was also consistent with the previous month.
The composite PMI rose from 50.1 in November to 50.5 in December.
Data showed that service sector inflation rose in November, increasing the likelihood of the Bank of Japan raising interest rates. Bank of Japan Governor Kazuo Ueda stated that the Bank of Japan needs to pay attention to developments in overseas situations, especially the policies of U.S. President-elect Donald Trump.
The Bank of Japan will hold its next policy meeting on January 23-24.
The money market bets that the Bank of Japan will gradually tighten its policy, expecting a 25 basis point rate hike before May, with another hike expected by the end of the year.
The Bank of Japan faces a difficult decision regarding the timing of its next rate hike. Inflation has remained at or above the Bank of Japan's 2% target for more than two and a half years. A rate hike would also help support the struggling yen.
However, Bloomberg Economics pointed out that the January meeting will take place four days after Trump's inauguration. Ueda has listed Trump's policies as one of the main uncertainties that need to be approached with caution. By March, Ueda will have a clearer understanding of the U.S. economy and domestic wage trends in Japan. This will also give the minority government led by Prime Minister Shigeru Ishiba more time to pass the budget. Ultimately, the yen may become a decisive factor.
Bloomberg Economics economist Taro Kimura stated, "Ueda's cautious stance at the December meeting indicates that the Bank of Japan wants to retain some room for maneuver when market and political conditions are favorable. We still firmly believe that the Bank of Japan will raise interest rates in January. The reason is that inflation seems increasingly likely to remain near the Bank of Japan's 2% target. The sharp decline of the yen will also increase the likelihood of a rate hike."