Japan service activity shrinks on softer sales, confidence slips further, PMI shows

TOKYO (Reuters) - Japan's service activity contracted in October on weaker sales, with business confidence slipping to the lowest level since March 2022 on concerns over shortage of labour, a private survey showed on Wednesday.

The final au Jibun Bank Service purchasing managers' index (PMI) dropped to 49.7 in October from 53.1 in September, according to an index publisher S&P Global Intelligence.

It was slightly above a flash reading of 49.3 but fell below the 50.0 threshold separating expansion from contraction for the first time since June.

"The strength of performance in the Japanese service sector came to an abrupt halt at the start of the fourth quarter," said Usamah Bhatti, economist at S&P Global Market Intelligence, adding that the downturn was driven by slower sales.

The services industry has been a bright spot for the world's fourth largest economy, anchoring growth and offsetting some of the drag from a struggling manufacturing sector.

Lingering concerns over labour shortage weighed down the business outlook for the next 12 months, with the index hitting the lowest level in 31 months. Businesses, though, said the drop was a blip and overall confidence remained strong, Bhatti said.

New business inflows in October grew at a slower pace while overseas demand sank into contraction territory for the first time since July, the survey showed. The service sector also saw outstanding business falling for the second time in three months on soft demand.

All of this softness bodes ill for the world's fourth largest economy as it struggles to lift-off due partly to frail consumer demand.

Japan's third quarter gross domestic product, due to be released on Nov. 15, is expected to have slowed sharply on sluggish consumption and capital spending.

Higher labour and raw material cost, as well as a weak yen, drove up the rate of inflation above the long-run average in October, according to the survey. Service companies kept passing increased costs from wages and raw materials to customers at a similar pace as in September.

The composite PMI, which combines the manufacturing and service activities, slumped to 49.6 in October from 52.0 in September, the joint-lowest since November last year.

(Reporting by Satoshi Sugiyama; Editing by Shri Navaratnam)