TOKYO (Reuters) - Japan's factory activity fell at the fastest pace in a year in March, dragged by declines in production and new orders in a worrying sign for the economy, a private-sector survey showed on Monday.
The service sector, which had been a bright spot in Japan's economy, also lost momentum, with business activity contracting for the first time in five months.
The au Jibun Bank Japan flash manufacturing purchasing managers' index (PMI) fell to 48.3 in March, the lowest in a year, from 49.0 in February.
The index stayed below the 50.0 threshold that separates growth from contraction for a ninth straight month.
The overall business outlook slipped to the lowest since August 2020, with firms expressing worries about factors such as rising costs, labour shortages and uncertainty over the global trade environment.
"Strong inflation, coupled with concerns over labour shortages, an ageing population, subdued client spending and increased uncertainty over the international trade environment dampened optimism," said Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence.
Among manufacturers, the subindex for production and new orders contracted in March, which led companies to cut back on purchasing activity and trim their inventories, the survey showed.
Firms increased employment for the fourth straight month amid a labour shortage.
Inflationary pressures stayed high and both input price and output charge indices maintained an expansionary trend.
"Cost pressures remained elevated in March, with overall input costs rising sharply across both monitored sectors, leading to a solid rise in selling prices," Fiddes said.
With lacklustre client spending, the au Jibun Bank flash services PMI shrank to 49.5 in March from 53.7 in February, the first contractionary reading since last October.
The au Jibun Bank flash Japan composite PMI, which combines both manufacturing and service sector activity, slipped to 48.5 from 52.0 in February, also the first contraction in five months.
(Reporting by Kaori Kaneko; Editing by Sam Holmes)