Japan’s service sector expanded at its strongest pace in five months in August, as firmer domestic demand and a rebound in new business lifted the S&P Global Japan Services Business Activity Index to 52.5 from 51.2 in July. The reading marked a third straight month above the 50.0 expansion threshold and the highest level since March. Service providers reported stronger gains in activity and new work, citing public-sector projects and a higher volume of client enquiries. New order growth rebounded from July’s 25-month low and ran slightly above the 2026 average, while new business expanded for a 26th consecutive month. The improvement was largely domestic: new export orders contracted for a fifth month and at the sharpest rate since November 2020. Employment rose for a 12th straight month, though job creation slowed to the weakest pace in a year, and backlogs increased only marginally. Input-cost inflation eased to a four-month low but remained elevated, and firms raised selling prices at the second-quickest rate since the survey began in late 2007. The S&P Global Japan Composite Output Index climbed to 53.5 from 52.7, its strongest reading in six months, with composite selling prices rising at the steepest rate since that series began. S&P Global’s Annabel Fiddes said sustained cost pressures and stronger growth strengthen the case for another Bank of Japan interest-rate hike, underscoring an uneven recovery driven by solid domestic demand alongside weakening exports.