Japan's services sector shrinks for first time since 2016 as sales tax hike kicks in: PMI

[TOKYO] Activity in Japan's services sector shrank for the first time in three years in October as a powerful typhoon and a sales tax hike weighed on demand, a survey showed on Wednesday, raising a red flag for the world's third-largest economy.

The final Jibun Bank Japan Services Purchasing Managers' Index (PMI) dropped to 49.7 in October from 52.8 in September on a seasonally-adjusted basis, and was down slightly from last week's 49.8 preliminary reading.

Though the decrease was marginal, the reading was below the 50 mark that separates expansion from contraction for the first time since September 2016. Resilient consumption has been largely keeping the country's fragile economic recovery on track despite prolonged pressure on its exporters and manufacturing sector.

"Unfortunately, it seems that the service sector may struggle to offset manufacturing weakness," said Joe Hayes, economist at IHS Markit, which compiles the survey.

"Short-term pricing and demand adjustments to the taxation change will likely dampen activity in the closing months of 2019."

Speculation has been rife the government may ask for additional spending in an extra budget at the end of the year in the face of weak production and declines in exports largely due to a slump in overseas demand.

Policymakers are also assessing the impact of the Oct 1 sales tax increase to 10 per cent from 8 per cent, the first such increase since April 2014.

New order growth slowed to a 17-month low, though it continued to expand modestly, the survey showed.

Services firms were also able to pass on higher costs to their customers and remained optimistic on the business outlook for the next 12 months.

"There are reasons to be positive as new orders continued to rise, despite the poor weather exacerbating negative effects from the sales tax hike," said IHS Markit's Hayes.

Typhoon Hagibis tore through central and eastern Japan last month, killing at least 89 with seven still missing, according to the Yomiuri newspaper.

The composite PMI, which includes both manufacturing and services, dropped to 49.1, slipping into contraction for the first time since September 2016.

That compared to a final reading of 51.5 in the previous month.

REUTERS