Japan's services activity expanded at a faster pace in August, supported by stronger domestic demand and higher new business, S&P Global said Thursday.

The headline seasonally adjusted S&P Global Japan Services PMI Business Activity Index rose to 52.5 in August from 51.2 in July, marking the third straight month of expansion and the strongest rate of growth since March.

Total new order growth also picked up from July's 25-month low, driven largely by firmer domestic demand. However, the new export business continued to decline sharply.

"Growth momentum picked up across Japan's service sector in August, with business activity rising at the fastest pace since March and new order growth improving from July's recent low," Annabel Fiddes, S&P Global Market Intelligence's economics associate director, said.

Hiring remained subdued, with employment growth slowing for a second straight month to its weakest pace in a year.

Outstanding business rose only slightly, while business confidence improved from July but remained among the lowest levels seen in recent years.

Cost pressures remained substantial, prompting service providers to raise output prices at the second-fastest pace on record. Fiddes said sharp cost pressures, alongside stronger growth, strengthened the case for another Bank of Japan interest-rate hike.

The S&P Global Japan Composite Output Index rose to 53.5 in August from 52.7 in July, with private-sector activity expanding for a 17th straight month and at its fastest pace since before the outbreak of war in the Middle East in February.