Japan's factory activity expands at slower pace, cost pressures surge

TOKYO, May 21 (Reuters) - Japan's manufacturing ‌activity slowed slightly ​in ​May, while service sector growth ground to a halt for the first time in over a year, as surging costs linked to ‌the Middle East conflict weighed on confidence, a business survey showed ⁠on Thursday.

• The S&P Global flash Japan Manufacturing Purchasing Managers' Index (PMI) fell to 54.5 in May, ‌from 55.1 in April. A ‌reading above 50.0 indicates expansion, while below that level signals contraction.

• A key sub-index for factory output expanded for the fifth straight month but the ​pace of growth eased from April. The sustained rise in production was partly attributed to stockpiling efforts as the Middle East war continued to disrupt ⁠supply chains and drive up prices.

• The service sector stagnated, with the flash Japan services PMI index falling ​to 50.0 in May from 51.0 in April, ending 13 months of growth.

• Cost pressures intensified sharply across the private sector. ​Input prices rose at the fastest pace ‌since October 2022 due to supply disruption and raw material shortages stemming from the Middle East conflict. Manufacturers experienced a sharper ⁠rise in costs compared with the services sector.

• In response to surging expenses, Japanese companies raised their selling prices at the sharpest rate on record in nearly 19 years ⁠of data collection, though the pace of increase remained slower than input cost inflation.

• Annabel Fiddes, ​economics associate director at S&P Global Market Intelligence, said: "If cost pressures continue to mount and demand softens, business confidence and the broader economy could come under greater strain in the ‌months ahead."

• Business confidence for the year ahead edged up to a three-month high but remained historically subdued, with firms ‌expressing ongoing concerns over the war's impact on supply chains and inflation.

• The flash ⁠Japan composite PMI, which combines manufacturing ‌and services activities, fell ​to 51.1 in May from 52.2 in April, marking the softest pace of expansion in five months.

(Reporting by Kaori Kaneko; Editing by ‌Sam Holmes)

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