Japan Jan services activity growth at three-month high - PMI

A woman works at a coffee shop in Tokyo

TOKYO (Reuters) - Japan's services sector activity grew at its fastest pace in three months in January, but worsening inflation and employment trends point to challenges ahead, a business survey showed, as policymakers bet on the country's economic reopening to lift demand.

Friday's final au Jibun Bank Japan Services purchasing managers' index (PMI) rose in January to a seasonally adjusted 52.3 from December's 51.1, marking the fastest pace since October.

The final figure was slightly lower than the flash reading of 52.4, but stayed above the 50-mark that separates expansion from contraction for a fifth straight month.

"The start of 2023 saw a continuation of the recent positive news in the Japanese service sector as the economy continues to recover from the pandemic," said Andrew Harker, economics director at the pollster S&P Global Market Intelligence.

The subindexes for new orders and demand from overseas customers showed growth for a fifth month, thanks to Japan's relaxation of border controls, which boosted monthly visitors to the country above one million in December for the first time since February 2020. The pace of overseas demand, however, eased off slightly last month.

Service-sector firms were also cheered by the National Travel Discount Programme, a government-funded campaign that subsidies domestic trip expenses, Harker said.

On the flip side, the rate of input price inflation rose to a three-month high, while output price growth slowed from the previous month to a five-month low.

The contrasting price trends, which signals service companies' deteriorating profitability, bodes ill for the economy as firms and labour unions enter into annual pay negotiations, where higher wage hikes are seen as an important driver in underpinning Japan's post-pandemic growth.

In the service-sector survey, the subindex for employment posted the first contraction in 12 months as retirements outgrew the new recruits.

"These developments, and the limit they may place on growth, meant that companies were slightly less bullish about the outlook than they have been recently," said Harker.

The data also showed the composite PMI, which combines the manufacturing and services figures, rose to 50.7 in January from the previous month's 49.7, moving above the break-even 50 mark for the first time in three months.

(Reporting by Kantaro Komiya; Editing by Shri Navaratnam)