Japan service sector activity slumps most in a decade as virus impact spreads

TOKYO (Reuters) - Japan's services sector contracted at the fastest pace since the global financial crisis in March as a shock to demand from the coronavirus pandemic greatly hit business activity and expectations.

The world's third-largest economy is on the brink of recession after the coronavirus squashed hopes of a domestic-led recovery, ramping up pressure on policymakers to take major steps to support the economy.

The final seasonally adjusted au Jibun Bank Japan Services Purchasing Managers' Index (PMI) slumped to 33.8 in March from 46.8 in the previous month.

The headline figure marked the lowest reading since February 2009 during the global financial crisis but was slightly above a preliminary 32.7 released last week.

The survey showed business expectations shrank at their fastest pace in a decade, while new business was at its lowest level in nearly eight years, suggesting firms are struggling with the virus outbreak.

Companies also reported business closures at key clients and event cancellations, IHS Markit said.

"The latest combined manufacturing and services PMI data already point to GDP contracting at an annual rate of around 8%," said Joe Hayes, economist at IHS Markit, which compiles the survey.

"If the outbreak were to escalate in Japan such that widespread lockdowns are imposed, GDP in the second quarter could be poised for an annual decline in excess of 10%."

The virus crisis led to a severe fall in client demand, forcing some firms to cut staffing numbers, with the data showing employment conditions turned negative for the first time since late 2016.

The economy shrank a more than initially estimated annualised 7.1% in the fourth quarter, revised data last month showed, raising fears of a deepening slowdown even before the pandemic.

Prime Minister Shinzo Abe on Saturday ordered his cabinet to compile an unprecedented package of steps to support the economy as the coronavirus threatened widespread disruption across the nation.

The composite PMI, which includes both manufacturing and services, fell to 36.2 in March from the previous month's final 47.0, coming in at the lowest level since March 2009.

(Reporting by Daniel Leussink; Editing by Sam Holmes)