MNI ANALYSIS: Japan lukewarm Growth Lingers But Risks Abound

By Max Sato

     TOKYO (MNI) - Japan's lukewarm economic growth lingered through the first

half of the year, surviving severe weather patterns, but the threat of a global

trade war continues to keep the outlook uncertain.

     Gross domestic product returned to a modest recovery track in the

April-June quarter, growing at 0.5% on quarter, or an annualized 1.9%, backed by

solid consumption and business investment, after heavy snow caused the first

contraction in nine quarters in January-March, down 0.2% q/q, or annualized

0.9%, government data showed Friday.

     "Domestic demand, on average, is not so weak but not so strong, either," a

senior Cabinet Office official said. "Compared to late last year, the pace of

increase in exports have slowed but overseas demand is not falling."

     Domestic demand added 0.6 percentage point to the total output in Q2 after

shedding 0.3 percentage point in Q1, while external demand pushed down the

overall growth by 0.1 percentage point in Q2 after adding 0.1 percentage point

in Q1.

     --SENTIMENT, CONSUMPTION WOBBLY

     Private consumption, which accounts for about 60% of GDP, has been

generally sluggish as the average wage growth remains tepid while food and

energy prices have been rising.

     Japan's current and outlook sentiment indexes rebounded in June, led by

strong demand for beverages and air conditioners amid a dry rainy season and

forecasts for hot summer months ahead, according to the Economy Watchers' Survey

by the Cabinet Office.

     However, the indexes plunged in July, when the country was hit by heavy

rains in the southwestern regions, followed by killer heat waves. The storms

killed more than 200 people and destroyed infrastructure.

     --SLOW CAPEX GROWTH

     In Q2 GDP, business investment, another key factor, posted the seventh

straight quarterly rise, up 1.3% on quarter after rising 0.5% in Q1.

     Labor shortages are prompting some sectors to invest in automation while

others are seeking to boost production capacity and investing in research and

development.

     "Capex is seen in a wide range. The April-June figure is not very strong

but the implementation of stronger investment plans will emerge eventually," the

Cabinet Office official predicted.

     Asked about the risk of boosting capacity toward the end of a prolonged

economic expansion cycle when demand is about to slip, resulting in a slash in

capital stock later, he said, "I don't think we are at a late stage of the

cycle, but regardless of what stage we are at, the recovery in capex is not so

strong, so it won't add too much adjustment pressure."

     --TRADE ROW RISKS

     While the U.S. disputes with China and other trading partners didn't have a

direct impact on Japan's GDP rebound in the second quarter, concerns about

spillover effects remain, keeping business sentiment cautious.

     For example, if smartphone exports from China to the main U.S. market drop

amid the trade row, Japanese shipments of electronics parts and chip-making

equipment to China will also decline.

     "On the other hand, demand for alternative production would cancel out the

decline. If Chinese production drops, Japanese firms may produce more in the

U.S. or export more to the U.S.," the Cabinet Office official said.

     The U.S. move in March to impose high steel and aluminum tariffs has not

hurt Japanese metal makers as U.S. industries need specialized high-quality

metal products that only Japanese firms can provide.

     But the ultimate risk for Japan's exports, and thus its sustained economic

recovery, is Washington's threat to levy a high tariff on Japanese autos, which

President Trump has said should lead to a smaller U.S. trade deficit with Japan

and other major economies.

     The Commerce Department is probing the possibility that automobile imports

are threatening U.S. national security and it will report its conclusions to the

president in nine months from May 23.

     "If the trade war escalates and global growth slows down, the Japanese

economy will also slow down," the official said.

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

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