Recently released business surveys predicted that Japan’s economy is becoming more and more dependent on services, as the country’s factory activity decreased for the sixth consecutive month due to weak demand while the service sector continued to grow in December 2024.
At a slower rate, the au Jibun Bank flash Japan manufacturing purchasing managers’ index (PMI) fell from 49.0 in November to 49.5 in December. Since June 2024, the index has stayed below the 50-point cutoff where expansion and contraction are distinguished.
“Diverging trends continued to be seen in demand, with services firms seeing the strongest rise in new business in four months, while goods producers saw a stronger reduction in orders,” Usamah Bhatti, economist at S&P Global Market Intelligence said, as reported by the Zawya.
The factory sector’s business confidence dropped to its lowest point since May 2022. Indicating ongoing cost pressure, output prices rose to their highest level since July, while input inflation increased at the quickest rate in four months.
Meanwhile, the au Jibun Bank flash services PMI increased from 50.5 in November to 51.4 in December. Despite growth hitting a four-month high, worries about a labour shortage and growing expenses caused business sentiment to decline.
The average selling price increased at its quickest rate in eight months due to the higher input costs. The manufacturing and service sector activity-based au Jibun Bank flash Japan composite PMI increased from 50.1 in November to 50.8 in December.
According to a Bank of Japan “tankan” survey released on Friday, the mood of Japanese large manufacturers improved marginally, while non-manufacturers remained optimistic about the state of business in the three months leading up to December.
However, businesses anticipate that over the next three months, business conditions will deteriorate due to a lacklustre global demand and the threat of higher tariffs from US President-elect Donald Trump.
Meanwhile, As per the reports, the Bank of Japan (BOJ) is leaning toward keeping interest rates steady as policymakers prefer to spend more time scrutinising overseas risks and clues on next year’s wage outlook.
Any such decision will heighten the chance of a rate hike at the central bank’s subsequent meeting in January or March 2025, when there will be more information on the extent to which wage hikes will broaden in the coming days. However, as per Reuters, there is no consensus within the central bank on the final decision, with some on the board still believing the Asian giant has met the conditions for raising rates in December 2024. The decision will depend on the conviction each board member holds on the likelihood of Japan achieving sustained, wage-driven price rises.
“There are also chances that the board may favour acting if upcoming events, such as the United States Federal Reserve’s rate-setting meeting that concludes hours before that of the BOJ, trigger a renewed yen plunge that heightens inflationary pressure. But overall, many BOJ policymakers appear in no rush to pull the trigger with little risk of inflation overshooting despite Japan’s still near-zero borrowing costs,” the media house stated.
The BOJ will hold its final policy meeting for the year on December 18-19, when the nine-member board will deliberate whether to raise short-term interest rates from the current 0.25%. Just over half of economists polled by Reuters in November 2024 expect the BOJ to raise rates in December. About 90% forecast the BOJ to have hiked rates to 0.5% by the end of March. By contrast, markets are currently pricing in less than a 30% probability of a rate increase in December.