Japan's Heat Wave Fuels Stay-Cool Spending But Reversal Looms

(Bloomberg) -- The record-breaking heat wave in Japan has likely caused people to spend more in search of relief. That’s good for the economy, of course, but there will be a price to pay later.

To beat the extreme heat, people spend more on things including electricity fees and cold beer. That means they’ll cut back later, while the record temperatures will result in higher prices for staples such as fresh vegetables.

Every increase in the average temperature by one degree Celsius during the July-September quarter results in an estimated 320 billion yen ($2.9 billion) rise in consumption, according to Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute Inc.

The problem is, consumption usually falls by a similar amount in the autumn, he said.

At the same time, prices of food such as fresh fruit and vegetables will likely rise because of the hot weather. Fresh vegetable prices jumped 29 percent and fruit prices 24 percent from a year earlier in October 2010, after the hottest summer in decades.

Temperatures reached as high as 41 degrees in Japan this past week, contributing to dozens of deaths, and unusually high temperatures are expected to continue until early August.

Poor weather later in the year could also take a toll on consumption, said Hidenori Suezawa, an analyst at SMBC Nikko Securities in Tokyo. Spending on tourism will likely drop in the autumn, when bigger typhoons are expected after the hot summer, while winter items likely won’t sell well due to warm winter expected due to El Nino at the end of the year, he said.

All of these factors may play into Prime Minister Shinzo Abe’s thinking about whether to proceed with a planned rise in the sales tax scheduled for October 2019, a decision that could be made by the end of this year for budgetary reasons, Nagahama said.

Abe has already postponed the increase to 10 percent twice, and if he expects consumers to be feeling battered in coming months, he may decide to postpone it again, Nagahama said.

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