Japan's service sector extends gains in September, PMI shows

TOKYO, Oct 3 (Reuters) - Japan's service sector activity extended solid gains in September, buoyed by strong domestic demand and in sharp contrast to shrinking factory activity, a private-sector survey reported on Friday.

The S&P Global final Japan Services Purchasing Managers' Index (PMI) edged up to 53.3 in September from 53.1 in August, marking a slightly steeper increase in business activity and an 11th month of readings above the 50.0 threshold, which indicates growth.

The final reading for September also overshot the flash figure of 53.0.

The sustained expansion in the services sector was driven by a constant increase in new orders, particularly from domestic clients, the survey showed. Meanwhile, new export business decreased for a third month.

Employment in the service sector expanded slightly as firms responded to increased sales and anticipated future demand, according to survey respondents.

Business confidence was also at an eight-month high, with optimism linked to planned company expansions and new product releases, the data showed.

The rate of input cost inflation eased slightly, but companies continued to note high costs for labour, raw materials and fuel, leading to a solid rise in output charges as they passed on expenses to customers.

The broader picture for Japan's economy was less optimistic in September, as the S&P Global Japan Composite PMI, which includes both manufacturing and services, fell to 51.3 from 52.0 in August.

This marked the slowest combined rate of growth since May, as the sustained expansion of services was offset by a sharper decline in factory activity.

"The survey data also suggest that growth is being largely driven by stronger domestic demand, as both manufacturers and services companies noted further falls in new export business," said Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence.

Japanese businesses were starting to weather the initial hit from U.S. tariffs, but worries remain over rising labour costs, slowing tourist demand and inflation, according to the Bank of Japan's quarterly survey published on Wednesday. (Reporting by Kantaro Komiya; Editing by Sam Holmes)