TOKYO (Reuters) - Japan's services sector saw its deepest contraction in more than three years in December as business activity took a hit from weak demand at home and abroad, a private survey showed on Tuesday.
The final seasonally adjusted Jibun Bank Japan Services Purchasing Managers' Index (PMI) fell to 49.4 in December from 50.3 in November, declining to its lowest level since September 2016.
It was below the 50 mark that separates expansion from contraction for the second time in three months, and down from a preliminary reading of 50.6.
"Survey data for the three months to December imply that fourth quarter GDP (gross domestic product) is likely to contract," said Joe Hayes, economist at IHS Markit, which compiles the survey.
A sales tax increase and typhoon had weighed on business activity in October, and there was only a very limited recovery in November, Hayes said.
With growth in new work remaining subdued, companies turned their focus on outstanding orders.
Backlogs of work fell to the lowest since May 2018, the survey showed, underlining the challenge facing policymakers who are hoping domestic demand will stay strong enough to hold up economic growth.
New export business - another key activity gauge - slumped to a six-month low, suggesting the economy is likely to remain under pressure as slower global growth hurts demand.
Japan's economy grew at an annualized 1.8% in the third quarter because of stronger consumer and business spending, but analysts expect it to shrink in the quarter through December due to deepening internal and external strains.
Retail sales fell 2.1% in November as consumer sentiment stayed depressed after October's sales tax hike, which looks to have hit private consumption harder than the government thought.
The composite PMI, which includes both manufacturing and services, fell for the third straight month in December, seeing the fastest pace of decline since April 2014.
The index dropped to 48.6 from November's final 49.8.
"The Japanese economy has most likely entered a cyclical lull, although continued job creation and upbeat expectations provide a glimmer of hope," said IHS Markit's Hayes.