MNI ANALYSIS: Japan Sentiment Resilient Amid North Korean Risk

By Max Sato 

     TOKYO (MNI) - Sentiment among Japanese businesses and consumers remains

resilient despite some negative effects due to the threat of North Korean

nuclear weapons and missile attacks as well as what looks to be a temporary

damper from bad weather.

     The Economy Watchers sentiment index for Japan's current economic climate

stood at 49.7 in August, unchanged from July, when it posted the first

month-on-month drop in four months on a seasonally adjusted basis, data released

Friday showed.

     News of Pyongyang's threat to launch a ballistic missile toward the U.S.

territory of Guam led to some cancellations of overseas holiday tours, hitting

Japanese travel agencies, according to the latest Economy Watchers' Survey

conducted from Aug. 25 to Aug. 31.

     Long rainy days in August dampened the service sector, including operators

of theme parks and golf links.

     "On the upside, inbound demand at department stores continued to be strong

while the rainy weather led people to spend more on eating out nearby, instead

of going on a trip," said Cabinet Office director of regional economies Shigeru

Hirota. "Orders in the manufacturing sector were also high."

     "Consumer spending remains solid, backed by improving employment and income

conditions."

     Looking ahead, sentiment is slightly brighter as some people expect the bad

weather to be only a temporary factor and others believe businesses and

consumers are getting used to news of escalating tensions between North Korea

and the U.S. over Pyongyang's nuclear weapons program.

     The Economy Watchers outlook index showed sentiment regarding the next two

to three months marking the first month-on-month rise in two months, up 0.8

point at 51.1 in August after a 0.2-point slip in July.

     The number of Watchers' outlook comments on the North Korean risk increased

to 52 in the August survey from eight in July, indicating lingering concerns,

but most of them believe the risk is neutral to their business.

     Unless the yen appreciates sharply beyond Y105 and causes concerns about

export profits, job security and wage growth, this geopolitical risk may not

affect Watchers' sentiment too much.

     That gauge is influenced more strongly by more mundane factors, such as

local weather. Some Watchers fear the long stretch of rainy days and the lack of

sunshine in August will keep vegetable prices high, hurting supermarket sales.

     Government data released Friday showed that April-June GDP growth was

revised down sharply largely because business investment turned out to be slower

than previously reported, but economists welcomed the revision as it means the

economy was expanding at a more sustainable pace. The preliminary estimate of a

surge in capital investment had been widely considered too good to be true.

     Private consumption was revised down slightly but it remained the key

driver, with its contribution to the Q2 GDP growth of 0.6% unrevised at +0.5

percentage point. The contribution of capex was revised down to +0.1 percentage

point from +0.4 percentage point.

     Drops in factory output and household spending in July indicated the

economy started the July-September quarter with a softer tone after growth far

above its potential in the previous quarter. Bad weather is expected to slow

strong consumption seen in Q2 but at the same time, external demand is likely to

rebound in Q3 after a temporary slip in exports to Asia in Q2.

     "The downward revision in the April-June GDP is unlikely to prompt

economists to sharply revise down their forecasts for this fiscal year and

next," said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset

Management. "Slower growth is better for making the current modest economic

recovery cycle more sustainable."

     Real Q2 GDP was revised down to +0.6% on quarter, or an annualized +2.5%,

from the preliminary estimate of +1.0% on quarter, or an annualized 4.0%. The

downward revision came from domestic demand. Its contribution to overall growth

was revised down to +0.9 percentage point from the preliminary estimate of +1.3

percentage points.

     Capital investment was revised down to +0.5% on quarter, or an annualized

2.1%, from the initial reading of +2.4% on quarter, or an annualized 9.9%. But

it was the third consecutive quarter-on-quarter rise after +0.5% in Q1,

indicating solid demand for replacing obsolete equipment and coping with labor

shortages.

     The sixth straight quarterly expansion in GDP followed growth in the

January-March quarter of +0.3% on quarter, or an annualized +1.2%. The recent

annualized growth pace has been above Japan's potential growth rate, estimated

to be just under 1%.

     Data released last week showed that Japan's Consumer Confidence Survey

index slipped 0.5 point to 43.3 in August on a seasonally adjusted basis,

posting the first month-on-month drop in two months after rising 0.5 point to

43.8 in July, hit by bad weather and heightened tensions between North Korea and

the U.S.

     The government downgraded its assessment for the first time in nine months,

saying confidence was "largely flat," instead of the previous state of "picking

up" seen for the five months through July.

     The confidence level is still considered fairly high, but the index's

three-month moving average for the June-August period fell after rising in the

May-July period. The index has shown ups and downs in the past several months.

     "The long stretch of rainy days and the lack of sunshine dampened the

confidence in the Tohoku and Hokuriku regions [in northern and central Japan],

pushing down the overall confidence level," said Toshimi Nishizaki, director of

the Department of Business Statistics at the Cabinet Office. "People in those

regions saw their farming communities suffer and tourism was also hurt."

     "Escalating geopolitical risks caused the yen to appreciate and stock

prices to fall, another factor behind the fall in consumer confidence,"

Nishizaki said.

     If weather conditions improve in September, a rebound in sentiment is

possible but confidence is also affected by vegetable prices and the stock

market performance, another official said.

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

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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