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Japanese services sector expansion nears 2-year high as factories extend slump

Japan's services sector activity grew in August at the fastest pace in nearly two years, while the manufacturing industry saw a continued but slightly weaker contraction, preliminary data compiled by Jibun Bank Corp. and IHS Markit showed.

The headline Jibun Bank Japan Purchasing Managers' Index for the manufacturing sector ticked up to 49.5 in August from 49.4 in July, but remained below the 50-point level for the fourth straight month, signaling a continued contraction. Output and new orders saw a weaker decline while hiring slowed and backlogs of work registered a smaller depletion.

Japanese services sector growth accelerated in August, with the corresponding seasonally adjusted Business Activity Index climbing 1.6 points to 53.4, the highest reading since October 2017. Output, new orders and employment saw stronger growth, while backlogs of work accumulated.

The Composite Output Index, which includes manufacturing and services activities, increased to 51.7 in August from 50.6 in July, suggesting that the Japanese economy grew at the fastest pace in eight months. The solid growth in Japan's services sector is "allaying fears, at least for the time being, that strong external headwinds being felt within manufacturing could spread to other parts of the economy," said Joe Hayes, economist at IHS Markit.