Japan’s service sector continued to expand in September, but activity lost momentum after reaching a five-month high in August. The slowdown in business activity and new orders, alongside disruption from an earthquake, points to a more mixed economic picture as Japan enters the final quarter of 2026.

Services Growth Slows in September

The S&P Global final Japan Services Purchasing Managers’ Index (PMI) fell to 51.3 in September from 52.5 in August, which had been the strongest reading in five months. The final figure was also below the preliminary reading of 51.6. A reading above 50 indicates expansion, meaning the services sector remained in growth territory despite the loss of momentum.

New orders increased for a 27th consecutive month, but the pace of growth slowed from August. Stronger domestic demand continued to support sales, while new export business declined at the second-fastest rate since January 2021. The weaker external demand highlights the uneven nature of Japan’s recovery as businesses continue to face uncertainty in global markets.

Employment Strength Provides a Counterweight

Not all elements of the survey weakened. Employment in the services sector increased for a 13th consecutive month and at its fastest pace since February. Companies also reported the strongest increase in backlogs of work in seven months as they sought to expand capacity and fill vacancies.

These figures suggest that businesses continue to see sufficient underlying demand to maintain hiring and address accumulated workloads. However, the slower growth in new business indicates that the pace of expansion could remain constrained if domestic demand loses strength or overseas demand continues to weaken.

Cost Pressures and BOJ Policy Remain in Focus

Input-cost inflation eased to a six-month low but remained elevated by historical standards. Companies continued to report higher costs for raw materials, oil, labor and food. Service providers also raised their charges, although the pace of output-price inflation moderated from August.

The broader Composite PMI, which combines manufacturing and services, fell to 52.3 in September from 53.5 in August, marking its weakest reading since May. The data therefore reinforce the mixed picture emerging from Japan’s economy. The Bank of Japan’s quarterly Tankan survey showed that manufacturers’ confidence reached an eight-year high during the July-September quarter, while sentiment among non-manufacturers weakened.

Investors will now monitor whether the slowdown in services activity extends into the fourth quarter and whether domestic demand can offset weaker export demand. Employment remains a positive factor, but persistent cost pressures could continue to influence corporate pricing and household spending. For the Bank of Japan, the combination of continued private-sector expansion, labor-market strength and elevated costs will remain important as policymakers assess the timing and scope of future interest-rate decisions.