Japan's service sector activity worsens as Covid-19 pandemic stymies recovery

Activity in Japan's services sector contracted at a faster pace in August for the first time in four months, as uncertainty from the coronavirus pandemic weighed on sentiment, hurting business at home and from abroad.

The final Jibun Bank Japan Services Purchasing Managers' Index (PMI) inched down to a seasonally adjusted 45.0 in August from 45.4 in the previous month, pressured by weakening new business and business expectations.

The survey results will be discouraging news for policymakers who are counting on a pickup in domestic spending to help pull the world's third-largest economy out of a sharp recession.

"The Covid-19 pandemic continued to hang over the Japanese service sector in August, halting the previous momentum towards recovery amid fragile customer demand," said Andrew Harker, economics director at IHS Markit.

The headline index, which worsened for the first time since April, matched a preliminary reading, with firms reporting a negative impact from a lack of customers and restrictions on activity.

The survey also showed employment conditions in the services sector remained sluggish in August, with firms reporting the same pace of job cuts as in the previous month mainly due to reduced workloads.

Japan's July jobless rate rose to 2.9 percent and the jobs-to-applicants ratio slipped for a seventh straight month to 1.08, which marked the lowest level since April 2014, the government said this week.

The composite PMI, which includes both manufacturing and services, was largely unchanged in August from the previous month, ticking up to 45.2 from July's final 44.9.

"Services saw output fall more quickly than manufacturing for the first time since May, suggesting that the sector is more impacted by the lingering effects of the pandemic on-demand," Harker said.

"Any return to growth will likely depend on confidence among companies and customers alike that the virus has been brought under control."