The service industry in Japan continues to expand, providing support for the Bank of Japan's rate hike in January.

Due to strong demand and business expansion, Japan's service sector activity expanded for the second consecutive month in December. According to a survey conducted by S&P Global Market Intelligence, the final value of Japan's service sector PMI rose from 50.5 in November to 50.9 in December, although it was lower than the initial value of 51.4, it remained above the 50 mark for the second consecutive month. Usamah Bhatti, an economist at S&P Global Market Intelligence, said, "The data for December shows that the Japanese service sector performed well, with business activity and new business continuing to grow." The survey showed that in December of last year, the index for new business categories rose for the sixth consecutive month, driven mainly by growth in new customers, especially from the domestic Japanese market. Employment numbers increased for the 15th consecutive month, although the rate of growth slowed compared to November. Companies surveyed stated that they hired more employees based on business expansion plans. Business confidence remained positive in December, but slightly weakened compared to November. Companies participating in the survey are hopeful about future demand and activity growth in the coming year. Inflation remained high in December, mainly due to rising labor and raw material costs. Companies passed on the higher cost burden to customers, although the rate of price changes in December remained similar to the previous month. The composite PMI rose from 50.1 in November to 50.5 in December. Data showed that inflation in the service sector increased in November, raising the possibility of a rate hike by the Bank of Japan. Bank of Japan Governor Haruhiko Kuroda stated that the Bank of Japan needs to monitor developments in overseas conditions, especially the policies of President-elect Trump in the U.S. The Bank of Japan will hold its next policy meeting on January 23-24. Market expectations suggest that the Bank of Japan will gradually tighten its policy, with a 25 basis point rate hike expected before May and another rate hike expected before the end of the year. The Bank of Japan faces a difficult decision on the timing of the next rate hike. Inflation has been at or above the Bank of Japan's 2% target for over two and a half years. A rate hike would also help support the struggling yen. However, Bloomberg Economics pointed out that the January meeting will be held just four days after Trump's inauguration. Kuroda listed Trump's policy as one of the major uncertainties to be cautious about. By March, Kuroda will have a clearer understanding of the U.S. economy and wage trends in Japan. This will also give Prime Minister Shizo Abe's minority government more time to pass the budget. Ultimately, the yen may become a decisive factor. Taro Kimura, an economist at Bloomberg Economics, said, "Kuroda's cautious approach at the December meeting indicates that the Bank of Japan wants to keep some room for action when market and political conditions are favorable. We still believe that the Bank of Japan will raise rates in January. The reason is that inflation seems increasingly likely to remain near the Bank of Japan's 2% target. A sharp drop in the yen will also increase the likelihood of a rate hike."