Japan service sector shrinks at fastest pace in 5 months, firms shed staff

Companies less optimistic that activity would rise over the next year, with positive sentiment reaching a five-month low: PMI survey.

Japan's services sector activity contracted at the fastest pace in five months in January in a sign businesses faced pressure from a record surge in new coronavirus infections due to the Omicron variant.

The world's third-largest economy has seen COVID-19 cases surge in recent weeks, forcing the government to roll out tougher curbs across much of the country in response to a rise in hospital admissions driven by Omicron.

The final au Jibun Bank Japan Services Purchasing Managers' Index (PMI) slumped to a seasonally adjusted 47.6 from the prior month's 52.1 and a 48.8 flash reading.

That marked the fastest decline in business activity since August, while outstanding business saw the sharpest rate of reduction in four months, the survey showed. Service firms cut staffing levels at the fastest pace in 20 months and became less optimistic that activity would rise over the next year, with positive sentiment reaching a five-month low, the survey showed.

Input price growth for the sector stayed elevated, suggesting pressure on corporate profits from global raw material inflation remained. The private sector as a whole also continued to see cost burdens increase.

"The weakness in the larger service sector contributed to a broad stagnation in private sector output in January," said Usamah Bhatti, economist at IHS Markit, which compiles the survey.

"Total business activity dipped into contraction territory for the first time since September, despite a near eight-year high in manufacturing output growth."

The composite PMI, which is calculated using both manufacturing and services, dropped to 49.9 from December's final of 52.5.

(Reporting by Daniel Leussink; Editing by Sam Holmes)