Japan Govt: Modest Economic Recovery Intact Despite Risks

     TOKYO (MNI) - The Japanese government on Monday left its economic

assessment for August unchanged from the previous month, repeating that the

domestic economy is "in a moderate recovery," with the growth rate expected to

slow down after a surge in the second quarter.

     The government also left unchanged its assessment of consumption, capital

investment, exports and industrial production while upgrading its view on public

investment for the first time in two months as the effect of last fiscal year's

supplementary budget has emerged.

     In June, the government revised up its overall economic assessment for the

first time in six months.

     Looking ahead, the government maintained its outlook that the economy will

continue recovering moderately, backed by improvement of labor and income

conditions and the effects of fiscal spending.

     The government also repeated the risks to its outlook, citing uncertainty

in overseas economies and the effects of fluctuations in financial and capital

markets.

     "The North Korean nuclear threat is different from other risks that have

actually materialized, such as Brexit," Hideyuki Ibaragi, director of

macro-economic analysis at the Cabinet Office, told reporters.

     "However, since tensions have been heightened, we have to watch the impact

on financial markets."

     The government repeated that private consumption is "picking up moderately"

and that capital investment is "recovering."

     "Total employee compensation has been growing thanks to an increase in the

number of employees. Private consumption rose sharply in the April-June quarter,

but if you even it out, it is increasing moderately," Ibaragi said.

     "The long stretch of rainy days in August may have been a damper but

excluding its effect, and considering the recent improvement in wage income of

employees and consumer confidence, the increase in private consumption is

expected to continue for now."

     But Ibaragi said the government is being cautious about the outlook for

consumer spending as wage hikes remain slow.

     "We are not embracing the current situation with open arms. We have to

watch if it will be sustainable," he said.

     The Cabinet Office's Private Consumption Integrated Estimates index, which

is based on both supply- and demand-side data, posted the third straight

quarterly increase in April-June, up 0.9% on the quarter after rising 0.5% in

January-March.

     The Economy Watchers Survey showed that sentiment about Japan's current

economic climate posted the first month-on-month drop in four months in July,

down 0.3 point at 49.7 on a seasonally adjusted basis, after rising sharply by

1.4 points in June, but the level remained relatively high in the current

recovery phase.

     The slight drop in sentiment reflects the adverse effects of chronic labor

shortages and weather factors. Heavy rainfalls and flooding in southern Japan in

early July caused casualties and significant damage while heat waves made

consumers wary of buying fresh food for fear of food poisoning. On the other

hand, high temperatures boosted demand for air conditioners.

     The government also left unchanged its assessment of exports and industrial

production, the key drivers for current modest economic growth, saying they are

both "pickup up."

     Industrial production rose a seasonally adjusted 2.2% from the previous

month in June, the first rise in two months, after falling 3.6% in May. The

median forecast by economists polled by MNI showed factory output would slip

0.4% on month in July.

     Export volumes fell 0.4% on month in July, the second straight

month-on-month drop, after declining 0.6% in June. But Ibaragi noted that export

volumes to Asia rose 0.7% in July, showing demand is picking up after a

temporary dip.

     The average economist forecast for Q3 GDP growth is an annualized 1.44%

rise, down from the projected 2.24% expansion in Q2, according to the latest

monthly ESP Forecast Survey of 42 economists by the Japan Center for Economic

Research conducted from July 25 to Aug. 1. The survey showed economists

projected a gradual slowdown in the GDP growth rate toward 1% from Q3 onward.

     Japan's economy for the April-June quarter posted stronger-than-expected

growth of 1.0% on quarter, or an annualized 4.0%, as strong domestic demand --

led by consumption, business investment and public investment -- offset what is

seen as a temporary slip in external demand.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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