|Composite - Level||52.9||51.5|
|Services - Level||53.7||51.2|
The Japanese service sector improved substantially in August. Activity growth picked up to the strongest since October 2013, alongside a solid increase in new business. On the price front, inflationary pressures were evident as input prices rose, although at the slowest rate in four months. Charges also increased at a weaker pace. The August services index reading was 53.7, up from 51.2 in July, signalling a noticeable improvement in business activity at Japanese services companies. The latest reading was the highest in 22 months.
Meanwhile, output at Japanese manufacturers increased, albeit at a weaker pace than seen at the start of Q3. The Nikkei composite output index pointed to a sharp expansion in overall activity, posting at 52.9, up from 51.5 in July. Moreover, the latest reading was the highest since January 2014.
An improvement in service sector activity was underpinned by a further increase in new work intakes. Despite falling slightly from July's 26-month high, growth in new orders was the second-fastest in 2015 so far. Meanwhile, new order growth in the manufacturing sector accelerated to the fastest since January. As a result of increases in both activity and new business, pressure on capacity was evident at Japanese service providers as volumes of unfinished work accumulated in August. The rate of increase softened from July, but was in line with the average observed since the start of the year. Manufacturers also registered an increase in backlogs, although growth was only modest overall.
Despite reports of stronger output growth and an increase in new work intakes, Japanese services firms reduced their staffing numbers in August. However, the rate of job shedding was marginal overall. In contrast, manufacturers hired staff for the fifth successive month, with the rate of job creation little-changed from the seven-month high observed in July.
Inflationary pressures persisted at Japanese services firms in August as purchasing prices rose for the thirty-fourth month in a row. Higher staff wages were cited as a factor behind increased input costs. However, the rate of inflation slowed to a four-month low and was weaker than the historical average.
Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the 'Report' shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the 'diffusion' index. This index is the sum of the positive responses plus a half of those responding 'the same'.
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.