Japan June exports slide in warning sign for economic outlook

TOKYO Thu Jul 24, 2014 11:01am BST

1 of 2. Containers are stacked up at a port in Tokyo March 19, 2014. Japan's annual export growth in February was short of market expectations and a Bank of Japan policymaker warned about the outlook as the world's third-largest economy faces a sales tax hike next month that could dent economic activity.

Credit: Reuters/Yuya Shino

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TOKYO (Reuters) - Japan's exports unexpectedly fell in June for a second straight month, weighed down by a drop in shipments to Asia and the United States, signalling that weak external demand may require bolder measures from policymakers to sustain the country's economic recovery.

Exports fell 2.0 percent in June from a year earlier, compared with a 1.0 percent increase expected by economists in a Reuters poll, data from the Ministry of Finance showed on Thursday.

That followed a 2.7 percent decline in the prior month, which was the first annual drop in 15 months.

Sluggish exports, a weak spot in the world's third-largest economy, have been a concern for policymakers who hoped that a recovery in external demand would help offset the pain from a sales tax hike in April.

Analysts say weak exports alone may not prompt the Bank of Japan to expand its massive quantitative and qualitative monetary easing policy, but if domestic demand fails to convincingly recover, it could raise expectations for additional monetary expansion.

Those expectations had subsided in recent weeks in the face of the BOJ's dogged confidence that it will meet its goal to push inflation to 2 percent by next year. The target is a core element in the government's "Abenomics" strategy to pull the long-moribund economy from two decades of deflation.

"This raises more concern about how the economy will do after the sales tax hike and makes the government less likely to proceed with the next tax hike scheduled for next year," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

"Weak exports alone will not prompt the Bank of Japan to ease policy, but if consumer spending also weakened, then expectations for a policy change would increase."

Exports to the United States, a key market, fell 2.2 percent in June from a year ago as more Japanese companies produce goods in other countries, such as Mexico, for U.S. consumers. Car shipments to the United States fell 6.8 percent.

Exports to China, another key market for Japan, rose 1.5 percent, but exports to Asia, which accounts for more than half of Japan's total exports, fell 3.8 percent, hit by sluggish shipments of electronics parts.

Some respite for policymakers, though, came in the form of July's Markit/JMMA flash Japan Manufacturing Purchasing Managers Index (PMI) which saw the new export orders return to growth for the first time in four months.

INFLATION TARGET IN DOUBT?

Despite the BOJ's rosy outlook on prices, economists doubt its inflation target will be met next year. Economists expect inflation to stay at 1.1 percent this fiscal year and next, according to a Reuters poll released earlier on Thursday.

Tepid exports would weigh on the economy and keep a lid on inflation, posing challenges for policymakers. The BOJ and the government, as well as private-sector analysts, trimmed their economic growth estimates for the current fiscal year, but they have kept their inflation projections intact.

Analysts expect Japan's consumer inflation to slow to around 1 percent in the coming months as the impact of a weak yen on import costs runs its course, although prices are likely to pick up later this year if a tight labour market pushes up wages.

Data due on Friday is likely to show the nationwide core consumer price index, which includes oil products but excludes volatile fresh foods, rose 1.3 percent year-on-year in June, when stripping out the effect of the sales tax hike.

TRADE DEFICIT

Japan's imports grew 8.4 percent in the year to June, matching the median estimate, due to hefty fuel imports, bringing the trade balance to a deficit of 822.2 billion yen ($8.10 billion), the MOF data showed, marking two full years of trade shortfalls, the longest run on record.

On a half-year basis, Japan logged a record trade deficit of 7.5984 trillion yen in the first half of 2014, the data showed.

BOJ Governor Haruhiko Kuroda said last week exports would increase eventually as overseas markets, mainly in advanced economies, recover, while Finance Minister Taro Aso has also blamed weakness in emerging market economies for Japan's lacklustre export performance.Policymakers and analysts also cite the ongoing shift of Japanese factories abroad as being partially responsible for prolonged weakness in exports.

Aggressive monetary stimulus by the BOJ helped weaken the yen by roughly 20 percent in 2013, boosting exporters' profits and share prices. However, the yen has moved sideways this year versus the dollar, limiting gains in export proceeds and sales.

(Editing by Eric Meijer)

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