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Economy

Japan returns to growth as spending picks up

Q2 GDP lifted by rising wages but U.S.-China tensions weigh on outlook

Household spending helped Japan's economy return to growth in the second quarter.   © Reuters

TOKYO -- Japan's economy returned to growth in the April-June quarter after having contracted in the first three months of the year, thanks to a rebound in household spending and an increase in corporate investment.

But the escalating U.S.-China trade war casts a shadow over what could be a fragile recovery, analysts said.

Preliminary figures released on Friday showed gross domestic product logged an annualized 1.9% growth in the April-June quarter, beating the 1.4% median estimate among analysts polled by Reuters.

The rebound marks a turnaround from the first quarter's decline, which ended eight quarters of GDP growth -- Japan's longest such streak in nearly three decades.

Household consumption rose 2.8% on an annualized basis, bouncing back from a decline in the first three months. Analysts have said the first-quarter figures were a temporary interruption to the growth streak caused mainly by bad weather, and that a steady rise in wages continues to support consumption. Nominal wage growth reached 3.6% in June, the fastest pace in more than 21 years, according to government data.

"[Household consumption was] widely expected to remain weak based on the series of pre-GDP consumption-related data, but actually exceeded prior expectations, mainly on the back of a continued recovery in employee income," said Tetsufumi Yamakawa of Barclays.

Takuji Aida of Societe Generale Securities in Tokyo pointed to strong sales of durable goods like electronics as a sign that the sustained increase in salaries is finally encouraging people to spend on big-ticket items. A further pickup in consumer sentiment is expected to help cushion the impact of a planned sales tax hike in the autumn of 2019.

In the face of rising wages and unemployment at a 25-year low, companies are investing more in improving efficiency at their locations. Private nonresidential investment grew 5.2%.

On the other hand, lackluster exports pointed to looming risks. The increase in imports outstripped that in exports in the second quarter, resulting in net exports having a negative 0.1% contribution to overall GDP. With a decline in export orders, some analysts warn that companies may restrain production in the coming quarters, which would eventually hit investment.

The ongoing trade battle between Washington and Beijing may further dent investment appetite. "With strong uncertainty regarding the U.S.-China trade tensions, investment may be postponed both domestically and overseas," said Harumi Taguchi, principal economist at IHS Markit.

Japan's economy remains a long way off a full-fledged recovery -- the Bank of Japan continues to tackle weak inflation with negative interest rates, bucking the trend of its U.S. and European counterparts' tightening of monetary policy.

"Whether wages will continue to rise above inflation even when weak external demand weighs on the economy" is a key factor for continued economic expansion, Taguchi said.

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