Japan's private sector expanded at its fastest pace in six months in August, according to flash PMI data from S&P Global, as stronger new orders and improving business confidence pointed to a broadening economic recovery.

The seasonally adjusted Flash Composite Output Index rose to 53.4 in August from 52.7 in July, the strongest reading since February and the 17th consecutive month of output growth. On the PMI scale, readings above 50 signal expansion in activity while those below 50 indicate contraction. The flash figures are preliminary estimates compiled from around 85-90% of total monthly survey replies, with final August data due in early September to confirm the picture.

Manufacturing led the improvement. The Manufacturing PMI rose to 55.1 from 54.5, while the sector's Output Index eased slightly to 56.1 from 56.3. Even so, manufacturers recorded their quickest increase in new work since January 2018, and export orders rose at their fastest pace since the start of 2018. S&P Global said demand was supported by semiconductor- and AI-related industries.

Services also strengthened. The Services PMI Business Activity Index climbed to 52.3 from 51.2, marking the sector's second-fastest rate of expansion since February. However, services firms reported a sharper decline in new export business, highlighting a divergence in international demand between goods and services. Overall sales growth was joint-quickest over the past six months.

Employment increased for a 35th consecutive month, with hiring momentum edging higher from July and remaining above the historical average. Manufacturing payrolls rose solidly, while services firms added staff only marginally, the slowest pace of job growth in a year. Even so, the wider private-sector gain in headcount helped ease capacity pressures, reflected in the slowest increase in outstanding business in nine months.

Cost pressures showed signs of easing. Input price inflation slowed from June's near-record pace to a five-month low, though it remained sharp and well above the survey's long-run average. Firms continued to cite higher raw material, fuel and energy costs, along with wage pressure and weakness in the yen. Despite the moderation in input costs, selling prices for goods and services continued rising rapidly, with the pace still among the steepest on record.

Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said Japan's private sector continued to perform strongly in August, with firms signalling the quickest increase in output since February. She said manufacturers recorded their steepest rise in total sales and overseas demand in more than eight and a half years. Fiddes added that the easing of cost pressures would be welcome news, although firms may need a more sustained slowdown in inflation before reducing the near-record pace of output price rises. She also said improving business confidence, strong sales growth and further employment gains suggested Japan's private sector remains well placed to perform strongly, provided there are no further shocks to prices or demand.

Business confidence improved to its highest level since February, with manufacturers more optimistic than services firms. That follows Friday's stronger-than-expected inflation data and adds to evidence that Japan's economy is gaining momentum even as price pressures remain elevated.

The data also has implications for the Bank of Japan, which is due to meet on September 17-18. A private sector expanding at its fastest pace since February gives policymakers more confidence that the economy can withstand higher borrowing costs, while the persistence of near-record selling price inflation reinforces the case that underlying price pressures have further to run.

The earlier report, "BOJ seen hiking to 1.25% in September as Japan inflation pressures broaden," noted that markets are already pricing a high probability of a move to 1.25% next month. The August PMI release is unlikely to change that expectation, but it strengthens the case the BOJ may use to justify its decision and supports views that tightening could continue thereafter.