Japan factory activity sinks to lowest level in 10 months, PMI shows

TOKYO (Reuters) - Japan's factory activity slumped to the lowest level in 10 months on sluggish demand though the service sector strengthened further in January, preliminary business surveys showed on Friday.

The results underline the service industry's crucial support for the economy as it continues to anchor growth in the face of a struggling manufacturing sector.

The au Jibun Bank flash Japan manufacturing purchasing managers' index (PMI) sank to 48.8 in January from 49.6 in December. The index has remained below the 50.0 threshold separating expansion from contraction since June last year.

"The expansion in private sector business activity remained service-led," said Usamah Bhatti, economist at S&P Global Market Intelligence, which compiled the surveys.

The country's manufacturing sector has been under pressure for months due to subdued demand in both domestic and key overseas market. The December trade data showed exports to Japan's two largest trading partners fell, down 3% to China and 2.1% to the United States.

That was reflected in the PMI survey, which showed manufacturing output dropped at the steepest pace since last April while new order inflows fell to the slowest rate in six months.

Nevertheless, the Bank of Japan is expected to raise interest rates to 0.50% from 0.25% on Friday.

Analysts have said strong domestic wage momentum and price pressures support the case for a rate hike this week. The BOJ also said this month wage hikes were spreading to firms of all sizes and sectors, signalling conditions for a near-term hike were continuing to fall into place.

The manufacturing sector's input inflation eased slightly in January, leaving output prices unchanged from the previous month. Stocks of finished items went up for the first time since last July, anticipating an eventual recovery in demand.

The au Jibun Bank flash services PMI jumped to 52.7 in January from 50.9 in December thanks to a bump in new businesses.

While average input costs soared at the highest rate since last August and new export businesses expanded for the first time since September, price-charged inflation and business sentiment largely remained unchanged.

The au Jibun Bank flash Japan composite PMI, which combines both manufacturing and service sector activity, increased slightly to 51.1 in January from 50.5 in December.

(Reporting by Satoshi Sugiyama; Editing by Shri Navaratnam)