TOKYO–Japan returned to solid growth in the April-June quarter, a trend economists said was likely to continue on the back of higher wages and consumer spending unless trade conflicts with the U.S. worsen.
The world’s third-largest economy expanded at an annualized pace of 1.9% in the second quarter of 2018 after a revised 0.9% contraction in the first quarter, which ended the longest stretch of growth in 28 years.
The new figures confirm that the contraction “was nothing more than a temporary soft patch rather than the sign of a turning point in the business cycle,” said Barclays analyst Tetsufumi Yamakawa.
Prime Minister Shinzo Abe has cited the rise in gross domestic product since he took office in December 2012 as one of his top accomplishments. He is expected to win re-election next month to a new three-year term as leader of the ruling Liberal Democratic Party, allowing him to stay on as prime minister.
Analysts said domestic demand was likely to keep the economy on track if there isn’t bad news from overseas.
Private consumption, which accounts for nearly 60% of GDP, increased 0.7% in the second quarter as temporary pressures that weighed on spending earlier this year, including higher fresh-food prices and heavy snow, faded.
“A firm uptrend in wages–as summer bonuses increase significantly on the back of solid corporate earnings–is expected to support consumer spending,” said Société Générale economist Takuji Aida.
Nominal compensation of employees hit a record in the second quarter, rising 4.3% from a year earlier, and capital spending rose 1.3%. Companies have been investing more actively in labor-saving technologies as they cope with the tightest job market in decades.
However, Friday’s data showed increasing labor costs haven’t created any price pressures so far. The GDP deflator, a measure of inflation, slowed to 0.1% from 0.5% in the previous three months.
That suggests the Bank of Japan remains far from its 2% inflation target. The central bank last week tweaked its ultra-easy monetary policy so it can continue longer.
Mizuho Securities economist Toru Suehiro said consumers seem hesitant to spend a lot despite higher wages owing to fears about the future.
Exports, an engine of the Japanese economy, rose 0.2% in the April-June period. That is slower than the growth of about 2% in the last half of 2017, and economists said sluggish exports might keep a lid on growth.
A greater threat comes from the Trump administration, which is studying tariffs of up to 25% on autos and auto parts. Yoshimasa Maruyama, an economist at SMBC Nikko Securities, said a recent trade truce reached by President Trump with the European Union suggests the U.S. may refrain from tariffs, but “it remains the biggest risk factor” for Japan.
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