By Ambar Warrick 

Investing.com– Japanese business activity expanded slightly in September, preliminary data showed on Monday, although high inflation and a weakening yen continued to paint a bleak picture for the remainder of the year. 

The Japanese composite purchasing manager’s index (PMI) read 50.9 in September, data from au Jibun Bank and S&P Global (NYSE:SPGI) showed. The reading indicated an expansion in activity after August’s reading of 49.4.

Japan’s service sector accounted for most of the growth, with services PMI reading 51.9, up from August’s 49.5. A recovery in the service sector was driven largely by the easing of COVID-19 curbs in parts of the country, with sectors such as transport, real estate and financial services benefiting from the relaxed curbs. 

But the outlook for activity remained constrained, particularly due to rising inflation and a steadily weakening yen. Japan’s economy has been hit hard by rising commodity prices this year, which recently saw the country log a record trade deficit as its struggles with more expensive food and energy imports.

Increased costs saw Japan’s manufacturing sector worsen in September, with the PMI falling to 48.9 from 49.2 in the prior month. Local businesses are struggling with heightened raw material costs and passing them onto consumers, which has also worsened inflation. 

“A further loosening of (COVID) restrictions aided an expansion in September, but overall growth remains subdued as inflationary pressures and deteriorating global economic growth weigh on activity in both manufacturing and services sectors,” Joe Hayes, Senior Economist at S&P Global Market Intelligence wrote in a note.

“… businesses are reporting concerns around the economic outlook amid steep cost pressures and the rising likelihood of a global economic downturn.” 

While Japan’s economy grew more than expected in the June quarter, growth is expected to slow substantially in the second half of the year. 

The yen is also one of the worst-performing Asian currencies this year, recently sinking to a 24-year low amid dollar pressure and an increasing gap in local and international interest rates.