Japan Near Stagnation Following 9 Months of Growth; Service Sector Prices Back in Deflation; Spotlight on Abenomics

The pace of growth in Japan slowed to a crawl as new orders stagnate as noted by the Markit Japan Services PMI™ for July.

Key Points

• Weakest rise in service sector activity in nine months
• Services employment and new orders broadly stagnate
• Ninth successive month of higher input prices in the service sector

Summary

The latest data for Japanese service providers indicated that the expansion evident in previous surveys continued in July, but the pace slowed. Business activity increased only marginally, whilst new business and employment stagnated, in each case ending eight-month sequences of growth.

The headline seasonally adjusted Business Activity Index fell in July to 50.6 from 52.1 in June. Whilst this was the weakest increase so far in the current period of expansion, July marked the continuation of a nine-month run of growth, the longest ever recorded in the series.

Employment

Service sector employment stabilised in July, following eight months of expansion. Anecdotal evidence indicated that increased production, and expansions in sales teams, had compensated for strategic reductions in payroll numbers. The Composite Employment Index fell marginally, to the lowest level recorded since October 2012, and signalled a marginal drop in staffing levels.

Inflation

Input prices for the service sector continued to exert inflationary pressure as they rose for the ninth successive month, though the pace of inflation eased somewhat.

Meanwhile, prices charged by Japanese service providers ended their short period of inflation, and fell marginally in July.

Abenomics and Inflation

I agree with the comments of Claudia Tillbrooke, Economist at Markit who said:

"The Japanese service sector continued its nine-month sequence of growth in July, but the rate of expansion weakened. This follows a period of particularly strong performance relative to the survey history. Whether the short period of recovery will continue remains to be seen; but with the latest data showing employment and new orders stagnating in July, the outlook is distinctly less positive than reported in previous surveys."

Note that input prices are still rising yet prices charged are back in deflation. There is simply no demand for services in Japan.

Recall that prime minister Shinzo Abe wants taxes to double the sales tax rate from 5% to 10% by 2015 which will further decrease demand.

Should additional revenue come in from the tax hike, it will serve (in isolation) to strengthen the Yen, something Abe does not want.

So Abenomics remains in the spotlight. What's he going to propose next if deflation in prices remains?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com