Japan's Service Industry Experiences Rapid Growth! Despite a Decline in Tourists, Japan's Service Sector is on the Rise—Is the Winning Strategy "Domestic Demand-Driven"?

1. What PMI "53.6" Indicates

A figure of 53.6, significantly above the "watershed of economic sentiment" at 50. The July PMI announced by S&P Global on the 5th jumped 1.9 points from the previous month's 51.7, marking an acceleration since February. Behind the numbers, there is a glimpse of the excitement on the ground, such as "department store weekend visitors increased by 20% year-on-year" and "business hotel occupancy rate exceeded 80%."Reuters

2. Tailwind is Domestic Consumption—"Luxury Nearby Instead of Traveling"

New orders growth reached a three-month high. Many point out that those who postponed overseas travel due to the weak yen redirected their spending to luxury restaurants and entertainment in urban areas. On X, too,

"Bonuses for domestic gourmet rather than overseas! Strong consumer sentiment" (@tokyo_foodie) (Posted on 08/05)X (formerly Twitter)
such voices spread. The shift in consumption propensity is boosting the service industry.

3. Yet, "External Demand Brake" Remains Heavy

New export orders sharply declined by 3.4 points. Rumors of a series of earthquakes in the Kansai region, popular with inbound tourists, spread on social media, leading to a series of cancellations. There are also pessimistic comments that "unless earthquake risks are dispelled, it will be difficult for visitor numbers to recover in the latter half of the year."Reuters

4. Employment at a Standstill—Flat for the First Time in 21 Months

With a job-to-applicant ratio remaining high at 1.28 times, the reality is reflected in comments like "wage increases and securing manpower do not go hand in hand" (mid-sized hotel). The situation resembles a "bottleneck economy," where operations cannot run due to labor shortages, leading to missed sales opportunities. On the other hand, a survey by the Ministry of Health, Labor and Welfare shows that the turnover rate itself is on a declining trend, suggesting a transition to a structural phase of workforce retention.

5. Price Pressure Eases—Input Prices at 17-Month Low

The rise in raw material costs is slowing, aided by the stabilization of import food and energy prices. However, over 60% of companies see "no room for price cuts" due to persistently high transportation and labor costs. A startup running a math classroom strategizes, "We aim to expand our share by keeping tuition fees unchanged as long as classroom rent does not increase."

6. "Polarization" with Manufacturing—Composite PMI Barely at 51.6

The manufacturing PMI announced on the same day fell again into contraction territory from 49.8 to 49.5. The dual track of "services thriving, goods languishing" continues. A post from the trader community

"Service PMIs of major Asia-Pacific countries exceed expectations across the board. Japan at 53.6, China at 52.5..." (@TradersCom)X (formerly Twitter)
As indicated, Japan's service sector stands out in regional comparisons.

7. Policy Perspective—BOJ Cautious on Rate Hike Within the Year

Although the current core CPI is high at 2.7%, the rate of increase in service prices is slowing. The market consensus is "status quo until the end of the year." However, the provisional Japan-U.S. trade agreement at the end of July may further stimulate domestic demand and reignite wage inflation.Reuters

8. Market Reaction—Stock Rise & Weak Yen

In the Tokyo stock market on the 5th, TOPIX updated its year-to-date high, centered on restaurant and railway stocks. Meanwhile, the dollar-yen temporarily rose to the 146 yen level, and concerns about a slowdown in the recovery of travel-related sectors prompted yen selling. In the interest rate market, the 10-year government bond yield rose by 0.05%, with buying also spreading to financial stocks.

9. Decoding "Voices of the Street" on SNS

• Optimists"Growth reached this level even without tourism. If earthquake risks are eliminated, we can aim for the 60s" —@iNews24X (formerly Twitter)

• Cautious"Relying on domestic demand is unsustainable. Labor shortages and wage pressure will crush margins" —@kediaadvisoryX (formerly Twitter)

• On-the-Ground Perspective"Reservations are increasing, but securing staff is at its limit. We have no choice but to close earlier" —Restaurant owner in Tokyo (Interview)

10. Comparison with Other Countries—Difference with U.S. ISM Services Index

The U.S. ISM Services PMI announced on the same day was at a low level of 50.1 for the third consecutive month. As Europe and the U.S. struggle with economic slowdown, a scenario emerges where Japan's service sector becomes the "domestic demand honor student" of the world.FXStreet

11. Risk Factors and Opportunities

• Risks: Delayed tourism recovery, resurgence of wage inflation, geopolitical shocks

• Opportunities: Shift to domestic consumption due to weak yen, increased service exports to the U.S., DX and labor-saving investments

12. Conclusion—Can the Service Industry Become the "Navel of the Economy"?

While the manufacturing industry, which has been driving the Japanese economy, is at a standstill, the service industry is enhancing its presence through "surface growth." The figure of 53.6 is not just a statistical indicator but a mirror reflecting the "tangible feel of the city." How to unlock the three keys of employment, prices, and tourism—the next move is entrusted to the "co-creation" of companies and policy authorities.

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