Japan's services sector remained in expansion in July but the pace of growth decelerated, with private-sector firms reporting softer demand and persistent cost pressures, according to a private-sector survey released today.
The S&P Global final Japan Services Purchasing Managers' Index (PMI) dropped to 51.2 in July from 52.2 in June, and came in below the earlier preliminary reading of 51.9. Although the gauge remained above the 50.0 threshold that separates expansion from contraction, the reading signals a slowdown in services growth relative to prior months in 2026.
New business expanded at the weakest rate seen in two years, reflecting a weakening domestic spending backdrop. International demand for Japanese services continued to decline, marking the fourth consecutive month of contraction in foreign orders, but the rate of decline eased compared with May and June.
Input costs continued to climb, increasing at a rate slightly below June's four-year high. Survey respondents attributed elevated input-price inflation to the conflict in the Middle East, higher labour costs, and a weaker yen. Against that backdrop, service-sector firms increased their selling prices at the fastest pace since April 2014, when a consumption tax rise previously led to widespread retail price adjustments. Businesses cited the need to pass on higher costs to customers in order to protect profit margins.
Respondents also signalled expectations for strong producer price inflation through the year, particularly in light of disruptions to energy supply and shipping routes linked to the Middle East crisis.
The headline Composite PMI, which combines manufacturing and services activity, was largely unchanged at 52.7 in July versus 52.8 in June. Manufacturing experienced a surge in activity in June that helped offset the slower momentum seen in services for the composite reading.
Context and implications
While the services sector remains in expansion territory, the combination of weakening new business, softer foreign demand and sustained cost inflation presents a mixed outlook for service providers. Firms have been able to protect margins recently by raising prices, but persistent input-cost pressures tied to global supply disruptions and currency weakness pose ongoing challenges.