The rise in hospital admissions due to the rise in COVID 19 cases in recent weeks has forced the government to tighter controls across much of the country due to a surge in COVID 19 cases.
The final PMI of the Jibun Bank Japan Services Purchasing Managers' Index fell to 47.6 from the previous month's 52.1 and 48.8 flash reading.
The business activity fell by the fastest since August, while outstanding business saw the sharpest reduction in four months, according to the survey.
The survey showed that service firms cut staffing levels at the fastest pace in 20 months and were less optimistic that activity would rise over the next year, with positive sentiment reaching a five-month low.
Pressure on corporate profits was attributed to global raw material inflation, suggesting that the input price growth for the sector continued to be elevated.
The private sector as a whole saw cost burdens increase.
The weakness in the larger service sector contributed to a stagnation of private sector output in January, according to Usamah Bhatti, an economist at IHS Markit.
Business activity fell into contraction territory for the first time since September, despite a near eight-year high in manufacturing output growth. The composite PMI, which is calculated using both manufacturing and services, dropped to 49.9 from December's final of 52.5.