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Hot summer poised to temper Japan's second-quarter recovery

Consumers stay home while companies hold back on capex as trade tensions rise

Visitors to Nagoya Castle in August carry parasols to shade themselves amid Japan's sweltering heat. (Photo by Koji Uema)

TOKYO -- Higher wages helped steer Japan's economy back to a growth track in the second quarter, but soaring temperatures and escalating trade disputes threaten to cut the expansion short.

Real gross domestic product grew 1.9% in the April-June period compared with the previous quarter, preliminary government data released Friday showed. That marks a rebound from the first quarter's contraction.

The annualized growth far outpaced Japan's potential growth rate, estimated at around 1%. Of the quarter's 1.9% growth, internal demand contributed 2.4 points while external demand -- undermined by a surge in imports -- acted as a 0.5-point drag on GDP.

Consumer spending, which accounts for nearly 60% of GDP, rose. One factor was fatter incomes across the board. Small to midsize companies recorded the sharpest rise in pay in two decades.

In real terms, employee compensation climbed 1.9% from the preceding quarter, the fastest pace since growing 2% in the first quarter of 2003. Prices of fresh vegetables, which stabilized in the second quarter after reaching highs in the first, further propped up consumption.

For the July-September quarter, 13 private-sector think tanks predict GDP to climb 1.4% on an annualized basis. Most think tanks expect the economic recovery to continue until October 2019, when the consumption tax is scheduled to rise to 10% from 8%.

But the historic heat wave rolling across Japan has cooled the economic prospects. The high temperatures are expected to boost sales of summertime products, but the weather in many places has gotten too hot for people to venture outside. Customer traffic has declined in the retail, restaurant and leisure sectors.

Vegetable harvests have wilted under the heat, leading to higher grocery prices. Together with steeper electricity and gas bills, courtesy of higher oil prices, these factors could cancel out the higher wages and cause households to tighten their purse strings.

"With downward pressure on real income, consumer spending will not rebound strongly," said Yusuke Ichikawa, senior economist at the Mizuho Research Institute.

The international landscape, colored by the trade frictions coming from the U.S., is fraught with uncertainty. According to data from Japan's Cabinet Office, orders at electronic machinery makers are forecast to decline for the first time in five quarters in the July-September period. More companies will put off capital spending in the quarter due to the uncertainties stemming from the U.S.-China trade war, predicts Ryutaro Kono, chief Japan economist at BNP Paribas.

"More than the direct impact [of the trade frictions], I worry about the effect of softer capital expenditures due to cautiousness," said Hiroyuki Tanaka, president of industrial machinery supplier Sun-Wa Technos, echoing the concerns of many corporate executives.

The Organization for Economic Cooperation and Development's bellwether composite leading indicators have been on a downward slide since peaking in November last year, the pessimism fueled by the growing risk of trade stagnation.

Japanese automakers face the threat of higher vehicle tariffs from the White House. If the levies are hiked in the near term, the downward effect on GDP would surface in the first quarter of 2019, according to five think tanks. Another four say the impact would be detected during the fourth quarter of this year.

Mitsubishi UFJ Morgan Stanley Securities says a 25% tariff on Japanese autos would shrink exports to the U.S. by 20%, and drag down real GDP by 0.2 point.

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