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Japan business activity contracts in October as sales tax hike takes effect

Business activity in the Japanese private sector contracted in October amid an extended slump in the manufacturing industry and a slowdown in the services sector as the government's planned consumption tax increase took effect, survey data compiled by Jibun Bank Corp. and IHS Markit showed.

The Jibun Bank Flash Japan Composite Purchasing Managers' Index, which includes manufacturing and services activities, fell to 49.8 in October from 51.5 in September. A reading below 50 indicates contraction, while a figure above that reflects expansion.

The impact of the sales tax increase was somewhat obscured by the damage done by Typhoon Hagibis, which hit the service sector in particular, according to the survey.

The flash manufacturing purchasing managers' index dropped to 48.5 from 48.9, marking a new low since June 2016, amid the sharpest fall in new orders in almost seven years amid a weak global trade environment and limited demand in key export markets.

The flash services business activity index fell to 50.3 from 52.8, with a marginal rise in business output. The sector saw an improvement in demand with new orders growing at the fastest pace in four months.

"New business in the services economy exhibited a remarkable degree of resilience, as has generally been the case in the year to date," said Joe Hayes, economist at IHS Markit.

"Overall, it seems that temporary domestic factors have been the primary cause of reduced output at the start of the fourth quarter, suggesting there is potential for some payback in November," he added.