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Japan’s economy grew stronger than expected during the second quarter, supported by strong household and business spending.  It also recovered from an earlier contraction, though worldwide trade tensions still loom large as a major risk to the export and investment outlook.

The recovery in consumer spending was good news for the Bank of Japan.  However, it wouldn’t change the bank’s opinion that keeping interest rates low for a very long time is what the country needs to end its deflationary mindset. 

Analysts believe that the economy will sustain the recovery.  Others, though, believe that the worsening global trade disputes will hurt the exports and manufacturing sector, which are the major drivers of growth in Japan, the world’s third largest economy.

“Things are going well, but given questions around trade friction between the United States and China, there is a lot of uncertainty whether things will continue to go well,” said Japanese Finance Minister Taro Aso.

Japan’s economy grew 1.9 percent on an annualized basis in April-June, topping the average market expectations of a 1.4 percent expansion, according to government data on Friday.

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This came after a revised 0.9 percent contraction, which was larger than initial estimates, during the previous quarter.  That quarter was where the best run of growth for Japan since the 1980s bubble economy had ended.

When compared to the previous quarter, gross domestic product, or GDP, increased 0.5 percent.  This also topped market expectations of a 0.3 percent increase, following a 0.2 percent contraction in the January to March quarter.

Domestic demand was mostly the main driver of growth, standing as a sign of economy’s broadened recovery.

Private consumption was the biggest contributor, accounting for around 60 percent of the economy.  It rose 0.7 percent on brisk demand for cars and home appliances, according to the data.  This figure also beat market expectations of a 0.2 percent increase, marking a rebound from a revised 0.2 percent drop in the previous quarter.

“For the third and fourth quarters, we’ve penciled in similar growth to the second quarter, but the risks are a bit on the downside,” stated Capital Economics’ senior Japan economist Marcel Thieliant.  “The economy is running into capacity constraints.  We are quite certain there will be some sort of tariffs on Japanese cars.  It’s a question of how much.”

Many industries are struggling with labor shortages because of the rapidly ageing population.  This aids in pushing up wages, but it also has caused capacity constraints since some companies are shortening operating hours due to the scarcity in the number of workers.

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