Japan services PMI rebounds, input costs at four-year high

Japan's services sector activity rebounded to expansion in June, with the services PMI rising above the 50 threshold, while input cost inflation accelerated to its fastest pace in four years, according to a private survey released Friday.

The headline services PMI returned to growth territory after a brief contraction in May, driven by a solid increase in domestic new business. However, export orders weakened, reflecting a decline in tourist arrivals and subdued overseas demand. The data keeps pressure on the Bank of Japan to continue normalizing monetary policy, as the central bank has argued that underlying price momentum remains firm enough to justify further rate hikes.

For foreign exchange and currencies traders, the divergence between strong domestic demand and weakening external orders points to a two-speed economy that could complicate the yen outlook. If inbound tourism continues to soften, the current-account surplus may narrow, reducing a key support for the yen. Meanwhile, rising input costs reinforce the BOJ's hawkish bias, which could underpin the yen if markets price in a higher terminal rate. Traders can monitor real-time yen crosses and BOJ policy expectations on NowPrice's fx page.

Looking ahead, the key focus will be on the BOJ's July policy meeting, where the board will update its growth and inflation forecasts. Subdued year-ahead business sentiment, driven largely by uncertainty over the Middle East conflict rather than domestic factors, suggests that the BOJ may proceed cautiously. The yen's trajectory will also depend on incoming data on tourism, wages, and services inflation, as well as the path of US interest rates.