TOKYO, Feb 5 - Activity in Japan's service sector grew at the fastest pace in three months in January as new business picked up, suggesting domestic demand is improving and putting the country's economic recovery on more balanced footing, according to a private survey released on Monday.
The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) rose to 51.9 on a seasonally adjusted basis, from 51.1 in December.
The index remained above the 50 threshold that separates expansion from contraction for the 16th consecutive month.
The index for new business rose to 52.2 from 51.1 in the previous month, and the rate of growth accelerated for the first time since October.
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"January PMI data shows continued growth in Japanese service sector output," said Joe Hayes, economist at IHS Markit, which compiles the survey.
"Indeed, activity rose at a faster pace amid a stronger expansion in new business inflows. This supported forecasts of further economic growth by panelists, with business optimism strengthening to a 56-month high."
The survey also showed businesses were the most optimistic about future activity in 56 months, with firms citing planned new store openings and forecasts of continued solid economic growth.
Price pressures also continued to build, which will bolster the position of the Bank of Japan that inflation is slowly moving to its long elusive 2 percent target after years of massive monetary stimulus.
The index for prices charged by services sector companies rose to the highest since May 2014. Companies surveyed said they raised prices amid strong demand.
The composite PMI, which includes both manufacturing and services, rose to 52.8 in January, from 52.2 in December.
The Markit/Nikkei manufacturing PMI for January, released last week, rose to 54.8, suggesting factory activity grew at the fastest pace in almost four years.
Japan's gross domestic product has expanded for the past seven quarters, the strongest run of growth since 1994, but gains have been largely driven by exports.
The output gap shows demand exceeds supply by the most in more than nine years.
The labor market is also the tightest it has been in more than 40 years, which economists say will push up wages and support domestic demand.
(Reporting by Stanley White; Editing by Kim Coghill)