Private survey data released on Tuesday indicates that Japan's services sector experienced a stall in May, following over a year of continuous expansion. A sharp rise in costs linked to conflict in the Middle East dampened demand for services and pushed output price inflation to its highest level in twelve years.

The final au Jibun Bank Japan Services Purchasing Managers' Index, compiled by S&P Global, fell to 50.0 in May from 51.0 in April, halting a 13-month streak of growth. A PMI reading above 50.0 signifies expansion in business activity, while a figure below 50.0 indicates contraction.

The rate of new business growth decelerated for the third consecutive month, reaching its slowest pace in nearly two years. Within this, new export business declined sharply, registering the most significant drop since March 2022, as weak external demand and rising prices weighed on overseas sales.

Concurrently, cost pressures intensified sharply. Input prices rose at the fastest pace in over three years. The survey attributed the price surges primarily to increased charges from suppliers of fuel, energy, and raw materials during the Middle East conflict, alongside rising labor costs.

In response, service providers raised their selling prices at the quickest rate since April 2014, a period when Japan's consumption tax hike from 5% to 8% triggered widespread price increases.

Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence, commented, "Rising prices also weighed on demand, particularly in the service sector, as household budgets came under greater pressure."

Employment growth in the services sector slowed to a nine-month low. Some firms cited employee retirements and departures as factors constraining workforce expansion.

The survey showed that business confidence regarding the year ahead improved slightly for a second consecutive month. However, due to geopolitical uncertainty, elevated costs, and demographic challenges, optimism remained below the post-pandemic average.