TOKYO (Reuters) - Japanese manufacturing contracted for a third straight month in July, albeit at a slower pace, as domestic and export demand remained depressed, a preliminary business survey showed on Wednesday.
But the country's services sector showed signs of picking up, offsetting some of the pressure on the economy.
The Jibun Bank Flash Japan Manufacturing Purchasing Managers' Index (PMI) edged up to a seasonally adjusted 49.6 from a final 49.3 in the previous month, but stayed below the 50.0 threshold that separates contraction from expansion for a third month.
Factory output, total new orders and new export orders again contracted, though at a slightly more modest pace compared with June.
"Weak demand from China remained a key factor behind sluggish demand for Japanese goods," said Joe Hayes, economist at IHS Markit, which compiles the survey.
"Heightened frictions between Japan and South Korea also add downside risk to the manufacturing supply chain in Japan, creating additional slack that services may once again have to compensate for."
Japan this month tightened restrictions on the export to South Korea of three materials used in South Korean high-tech equipment, such as chips and smartphone displays.
Employment offered a bright spot, with the jobs index up at 51.3 from a final 50.8 in the previous month with companies hiring workers at a three-month high.
However, firms' backlogs of work remained at more than six-year lows, and they continued to cut back on purchases of raw materials.
Separate data showed Japanese service activity expanded. That, in turn, helped lift a composite PMI index which includes both manufacturing and services.
The Jibun Bank Flash Japan Services PMI climbed to 52.3 in July, up from a final 51.9 in June on a seasonally adjusted basis, their highest level since February.
If sustained, solid growth in services could help offset external pressure on the export-reliant economy, which is suffering from slowing global demand and the U.S.-China trade war.
Japan is exposed to the dispute as it exports big volumes of electronics items and heavy machinery to China which are used to make finished goods shipped to the United States.
A recent string of gloomy data, including faltering exports and slumping core machinery orders, offered the latest warning sign of the world's third-largest economy's exposure to a global growth slowdown.
The Jibun Bank Flash Japan Composite PMI edged up to 51.2 from 50.8 the previous month.
"Overall private sector output expanded at the fastest pace in seven months on the back of faster growth in services activity," IHS Markit's Hayes said.