Japan’s service activity extends gains on solid demand, PMI shows

TOKYO, May 7 (Reuters) - Japanese service sector activity grew at the fastest pace in eight months in April thanks to solid business and consumer spending, a private survey showed on Tuesday, results that should keep the central bank on track to hike rates again this year.

The final au Jibun Bank Service purchasing managers' index (PMI) rose to 54.3 last month, the highest level since August 2023, and up slightly from 54.1 in March.

The index has remained above the 50-mark that separates contraction from expansion since September 2022, but it edged down from the flash reading of 54.6.

The survey showed prices charged by firms to their clients increased sharply, with the rate of inflation hitting its highest since April 2014 when the nation raised the sales tax.

The firms cited rising expenses from higher wages as the main reason for passing on costs to customers, a fact that won't be lost on the Bank of Japan which has for years urged firms to raise pay at a steady pace to spur consumption.

The BOJ, which ended negative interest rates in a landmark decision in March, is expected to hike rates again this year. The central bank has signalled a cautious approach to further tightening due to a fragile economic recovery.

The service sector has been a bright spot in an economy that has struggled to mount a broad-based post-COVID revival, helping to offset some of the persistent weakness seen in manufacturing. For policymakers, the strength in business and consumer spending in the latest survey should be welcome news.

"April data revealed another strong month for the Japanese service sector as rising business and consumer spending fuelled the fastest upturn in business activity since August 2023," said Tim Moore, economics director at S&P Global Market Intelligence.

New business growth accelerated for the sixth straight month to hit the fastest pace since June 2023, with firms saying that sales were also boosted by robust inbound tourism, the survey showed.

Input prices increased at the quickest pace since August due to rising labour costs, as well as higher prices of transport and raw materials, which drove the substantial uptick in prices charged to clients.

"Service providers are increasingly seeking to negotiate higher prices charged with clients in response to elevated cost pressures," Moore said.

The composite PMI, which combines the manufacturing and service activity figures, expanded to 52.3 in April, the highest level since August 2023, from 51.7 in March. (Reporting by Kaori Kaneko Editing by Shri Navaratnam)