Japan Q2 GDP Growth Strong 4% Annualized on Consumption, Capex

--Japan Q2 Real GDP +1.0% Q/Q; MNI Median +0.7%

--Japan Q2 Real GDP +4.0% Annualized; MNI Median +2.6%

--Japan Q2 GDP Posts 6th Straight Q/Q Growth

--Japan Q2 Domestic Demand Contribution +1.3 Pct Point

--Japan Q2 Net Export Contribution -0.3 Pct Point

--Japan Q2 Consumption +0.9% Q/Q, +0.5 Point Contribution

--Japan Q2 Capex 2.4% Q/Q, +0.4 Point Contribution

--Japan Q2 Private Inventory Contribution +0.0 Pct Point

--Japan Q2 Public Investment +5.1% Q/Q, +0.2 Point Contribution

--Japan FY16 Real GDP +1.3%, 2nd Straight Rise; +1.3% in FY15

--Japan Q1 Real GDP Revised To +0.4% Q/Q From +0.3%

--Japan Q1 Real GDP Annualized Revised +1.5% From +1.0%

--Japan Q2 Deflator -0.4% Y/Y; Q1 -0.8%

--Japan Q2 Domestic Demand Deflator +0.4% Y/Y; Q1 +0.0%

     TOKYO (MNI) - Preliminary gross domestic product for the April-June quarter

was released by the Cabinet Office Monday.

     * Japan's economy for the April-June quarter posted high 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.

     * It was much stronger than the MNI median economist forecast for +0.7%

q/q, or an annualized +2.6%. The sixth straight quarterly expansion in GDP

followed a revised 0.4% rise on quarter (revised from 0.3%), or an annualized

+1.5% (revised from +1.0%), in January-March. The Q2 growth was well above the

potential growth rate estimated somewhere between 0.5% and 1%.

     * Domestic demand pushed up the Q2 growth by 1.3 percentage points while

external demand lowered it by 0.3 percentage point.

     * Net exports of goods and services -- exports minus imports -- made a

negative 0.3 percentage point contribution to total domestic output, in what

government officials and economists see as a temporary dip in shipments to Asia.

The median forecast was also -0.3 percentage point. It was the first drop in six

quarters following +0.1 percentage point in Q1.

     * Exports fell 0.5% on quarter in Q2 for the first drop in four quarters

after +1.9% in the first quarter, while imports rose 1.4% on strong domestic

demand, for the third consecutive rise after +1.3% in Q1.

     * Economists said the slowdown in exports is expected to be temporary and

that telecommunications equipment exports are likely to pick up toward year-end

as demand for iPhone parts increases.

     * Private consumption, which accounts for about 60% of GDP, posted the

sixth straight quarterly rise in Q2, backed by a modest recovery in average

wages amid a tight labor supply and stable fresh food prices. It rose 0.9% on

quarter in Q2 after rising 0.4% (revised up from +0.3%) in Q1, coming in

stronger than the median MNI economist forecast for +0.5%. It pushed up the Q2

GDP by 0.5 percentage point.

     * Consumption was also believed to be supported by emerging demand for

replacing automobiles and other durable goods that were purchased with the help

of government subsidies for fuel efficient cars and electronics.

     * "If we were to watch for a downside risk to consumption, summer bonuses

(paid between June and August) are estimated to be weaker than in the previous

year and heavy rainfalls (in July) might have hurt tourism in some regions," a

senior official from the Cabinet Office told reporters.

     * Consumption still lacks strength as wage growth remains slow amid

uncertainty over sustained economic recovery. People are also concerned about

how much they can save for their post-retirement lives as reforms for public

pension plans and medical services have been slow. "If there is another push for

social security reforms and wage growth, it will support consumption in a more

stable manner," the official said.

     * Business investment rose 2.4% on quarter in Q2 (the median forecast was

+1.4%) for the third straight quarterly rise and the pace of growth accelerated

sharply from a 0.9% gain in Q1. It pushed up the Q2 GDP by 0.4 percentage point.

Some firms are seeking to raise production capacity to meet higher demand while

others are trying to cope with labor shortages by investing in machines,

economists and government officials have said.

     * There are uncertainties over global growth but Japan has its own downside

risks. "Labor shortages are becoming a bottleneck for growth and it can affect

the demand side. We must keep a close watch," the Cabinet Office official said.

"The situation may have a negative impact on employment in the short term but it

should be positive to the overall economy."

     * Public investment rose 5.1%, the second consecutive rise after +0.6% in

Q1. Its contribution to GDP was +0.2 percentage point. The stimulus effect of

the second supplementary budget for fiscal 2016 was emerging.

     * Private-sector inventories had a largely neutral effect on growth. Its

contribution to Q2 GDP was +0.0 percentage point (vs. the median forecast for

+0.2 percentage point) following -0.1% point in Q1.

     * Housing investment rose 1.5% on quarter in Q2, the sixth straight rise

after rising 0.9% in Q1. It made zero (+0.0 percentage point) contribution to

overall economic growth.

     * As a measure of inflation, the GDP deflator fell 0.4% on year in Q2, the

fourth consecutive year-on-year drop after -0.8% in Q1. The domestic demand

deflator rose 0.4% on year in Q2 following +0.0% in Q1.

     * In fiscal 2016 that ended in March, real GDP grew 1.3%, marking the

second straight expansion after +1.3% in fiscal 2015 and -0.5% in fiscal 2014.

     * Going forward, economists expect a moderate economic recovery to continue

in July-September, based on a rise in exports and a moderate recovery of

domestic demand. But they also warned that the uncertainty over global demand is

a high downside risk to Japan.

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

rise, down from a 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% in Q3 onward.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

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

[TOPICS: MAJDS$,M$A$$$,M$J$$$,MT$$$$,MGJ$$$]