Japan’s services sector continued to grow in August, though at a slower rate. The S&P Global Services PMI fell to 53.1 from 53.6 in July. This strength in services offset some weaknesses in manufacturing, resulting in a composite PMI of 52.0, the highest since February. Domestic demand stayed strong, leading to the fastest rise in new orders since February. However, foreign demand saw its biggest drop in more than three years. Employment in this sector fell for the first time since September 2023, mainly due to resignations, leading to backlogs at their highest level in two years.

Input Costs and Business Confidence

Input costs increased again, putting pressure on profit margins, as businesses struggled to pass these costs onto consumers. Still, business confidence improved due to expected stronger demand and planned growth. Despite mixed signals in this report, the shrinking foreign demand stands out. With the yen trading near 155 to the dollar, this data gives the Bank of Japan little reason to tighten its policy at the upcoming meeting. This suggests that traders might consider options that bet on further yen weakness against major currencies. For the Nikkei 225, there is a split market: domestic-focused companies are doing well, while exporters face challenges. Strategies that favor domestic services and retail stocks look promising due to strong local demand noted in the report. In contrast, major exporters in the auto and electronics sectors may struggle with the sharpest fall in foreign orders in over three years. The dip in employment, the first since September 2023, raises concerns. This aligns with recent reports of a global slowdown, particularly with China’s industrial production hitting a two-year low last month. Looking back, this situation mirrors the market uncertainty we faced in 2024 when global growth fears peaked. The increase in backlogs from staff shortages could further hinder growth if this continues.

Market Volatility and Trading Strategies

Given these mixed signals, we may see increased market volatility in the coming weeks. Buying Nikkei 225 straddles or strangles could be a smart way to trade this uncertainty. This strategy benefits from significant price movement in either direction, which may happen as the market weighs domestic strength against global weakness. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now