SUMMER HEAT: Abnormal Weather Sparks Spending August 23, 2001 This summer the Japanese archipelago has been experiencing intense heat, with the mercury rising well above 30 degrees Celsius (86 degrees Fahrenheit) on a nearly daily basis, and the weather has been affecting the economy in numerous ways. Air conditioners, beer, summer clothes, and other seasonal items have been jumping off of store shelves, and it is hoped that higher personal consumption will mean stronger economic growth. But at the same time there is the possibility that negative effects will spread as well, as people avoid such outdoor activities as playing golf and visiting amusement parks. Whatever the results, the unusual weather has caused business plans to be altered in unexpected ways, and companies are moving to cope with the risks posed by abnormal weather. Sales of Seasonal Products Brisk Among seasonal products, air conditioners stand out as a particularly hot-selling item. According to Japan's largest retailer of electrical appliances, the run on air conditioners began in late June. In a one-month period, sales were up 50% over the previous year and continued to increase in July. Sales are booming at other major retailers as well, and many shops are unable to keep up with orders for installation. It is not uncommon for people to have to wait for more than one week to have their wall-mounted air conditioner set up. Beverages are enjoying booming sales as well. Beginning in late June major beer makers have been showing nearly 25% higher sales than the same period a year ago, and all the companies have been operating their breweries at full capacity to meet the demand. Summerwear like swimsuits, tank tops, and a new type of men's suits made of cool, light-weight material is selling well. Department stores are reporting a 10-20% increase over the same period last year in sales of these items beginning in late June. In addition, black parasols, which are touted as offering a better shield against the sun's ultraviolet rays, sunglasses with large lenses, folding fans, and pillows that are cooled in the refrigerator before use are popular this summer. In the stock market, while uncertainty looms over the falling prices of high-tech stocks and other factors, the bullish performance of the shares of electrical-appliance retailers, beverage makers, and clothing retailers is conspicuous. According to one securities firm, if the average temperature between June and August of a given year is one degree above that period's average for the 1990s, real personal consumption rises by 1.5% and gross domestic product by 0.9% in the July-September quarter. But at the same time, if the weather is too hot, people will likely lose their urge to go outside, and if the heat continues into autumn, demand for fall clothing may be blunted, offsetting any increase in summertime consumption. Businesses Manage Weather-Associated Risk A new theory is circulating among some meteorologists that this summer's extreme heat might be due to an abnormality in the sea-surface temperatures of the Indian Ocean. Referred to as the dipole mode phenomenon, it is said that when the sea-surface temperature of the western half of the Indian Ocean is high and that of the eastern half low, the area around Japan becomes unusually hot.   Your Name Send this article to a friend Due to the heat, many businesses have begun moving to cover the risks associated with unusual weather. Two businesses that work together in this regard are Tokyo Electric Power and Tokyo Gas. If the weather is exceedingly hot, demand for electricity rises as people crank up their air conditioners, and Tokyo Electric enjoys increased profits. At the same time, the demand for gas falls as people are less likely to take a hot bath, and Tokyo Gas sees its bottom line shrink. If the summer is cool, the two companies' results are reversed. To hedge against these swings, the two utilities forged a "temperature-risk" contract this summer. The contract stipulates a standard summer temperature of 26 degrees Celsius (78.8 degrees Fahrenheit). If the average temperature of August and September exceeds 26.5 degrees, Tokyo Electric pays Tokyo Gas a fixed amount of money, and if the average temperature is below 25.5 degrees, Tokyo Gas compensates Tokyo Electric. When the weather is too hot, fewer people play golf or visit amusement parks, and livestock raised for human consumption are more likely to die. People involved in these kinds of businesses are moving toward the use of financial products known as weather derivatives that will reimburse them in the event of unexpected weather conditions. Because abnormal weather is predicted to occur more frequently in the future, it appears likely that more and more companies are going to look to protect themselves from these kinds of risk. Copyright (c) 2001 Japan Information Network. Edited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.