Japan's services sector expansion slowed in September and came in weaker than market expectations.

S&P Global data showed that Japan's September services PMI fell to 51.3 from 52.5 in August, below the market forecast of 51.6, but still above the 50 boom-or-bust line for a fourth straight month.

The survey showed that growth in services activity and new orders both moderated. Some firms said client demand was weaker than expected, while the Kumamoto earthquake also caused some business disruption.

Domestic demand continued to support sales, but new export business fell notably, indicating that the September slowdown in services was mainly driven by external demand and cooler spending from some clients.

Employment was a bright spot in the data. Japanese services employment rose for a 13th consecutive month, and the pace of job creation was the fastest since February.

Companies continued to add staff, partly because backlogs of work were still rising and partly to expand capacity in preparation for future business growth.

Price pressures remained elevated, but input cost growth eased. Services firms continued to report higher costs for raw materials, labor, crude oil and food, though the rise in input prices slowed to a six-month low.

At the same time, companies were still raising selling prices at a relatively fast pace, with charge inflation remaining close to survey highs, suggesting firms still have strong pricing power.

Despite slower business activity during the month, firms' confidence in the year ahead actually strengthened. Optimism among services companies for the next 12 months rose to its highest since June, driven by expectations of improved client demand, new product launches, business diversification and further capacity investment.

The slowdown in services also weighed on Japan's overall private sector activity. The September composite output index fell to 52.3 from 53.5 in August, the weakest pace in four months, but still in expansion for an 18th straight month.

As a result, the signal from this data set is not that Japan's economy has suddenly weakened, but that private sector expansion has cooled somewhat, while employment, business confidence and price pressures remain strong.

S&P Global believes that with activity still growing and inflationary pressure persisting, this combination could still provide justification for the Bank of Japan to raise interest rates further, with the next hike possibly coming as early as the October meeting.