Japan current account surplus slumps after quake

Japan's Prime Minister Naoto Kan bows as the first extra budget for disaster relief is passed at upper house parliamentary session in Tokyo May 2, 2011.

TOKYO (Reuters) - Japan's current account surplus tumbled in March from a year earlier as exports fell and imports rose following a devastating earthquake and tsunami, and the surplus could shrink further as power shortages make it difficult for exporters to restore production to levels seen before the disaster.

Bank lending fell in the year to April at the slowest rate in 17 months as some companies sought extra funds at the start of the new fiscal year, which came after the earthquake that struck the northeast on March 11.

Economics Minister Kaoru Yosano said the quake is expected to shave 1 percentage point off GDP in the current fiscal year that began in April, but expressed confidence that damage to output can be overcome.

"The Japanese economy has begun to demonstrate its resilience. We believe the impact on production to be smaller than previously thought. Supply chains are recovering faster than expected," Yosano told a news conference on Thursday.

There is a chance that Japan has already fallen into recession, and recovery later this year could be hampered if power shortages prevent auto and electronics makers from ramping up exports. Lingering doubt about the outlook could build the case for more monetary policy easing to bolster sentiment.

The Bank of Japan, however, feels monetary policy cannot solve supply side problems and so may stand pat unless a spike in the yen severely hurts sentiment or supply constraints cause a slump in consumption.

Adding to concerns, separate data showed Japan's trade balance had already swung into a deficit in the first three weeks of April as exports plunged, suggesting it is set to log a deficit for the full month.

"Exports are weak and we are importing things that we weren't able to make domestically," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"Some factories are starting to increase production, so we are heading toward a gradual recovery, but there are still risks from the electricity supply. In order to reduce uncertainty, additional measures from the BOJ could be desirable."

But in a sign the damage to sentiment seems to be contained so far, Japan's service sector mood improved in April after posting a record fall in March, helped by efforts to repair supply constraints and prevent power shortages.

Japan's current account surplus fell 34.3 percent in March from a year earlier, Ministry of Finance data showed on Thursday, compared with the median forecast for a 31.3 percent annual decline in a Reuters poll of economists.

The surplus stood at 1.679 trillion yen ($20.7 billion), less than the median forecast of 1.754 trillion yen. Exports fell 1.4 percent from a year earlier, while imports jumped 16.6 percent.

In the April 1-20 period, exports fell 12.7 percent from a year earlier -- the biggest drop since October 2009 when the economy was reeling from the global financial crisis -- resulting in a trade deficit of 786.8 billion yen, separate Ministry of Finance data showed.

Outstanding loans held by Japanese banks fell 0.9 percent in April from a year earlier, the Bank of Japan said on Thursday.

Japan is facing its worst crisis since World War Two after a 9.0 magnitude earthquake and a tsunami towering more than 10 meters battered its northeast coast two months ago, leaving about 25,000 dead or missing and triggering radiation leaks at the Fukushima Daiichi nuclear power plant.

Shortages of electricity and important parts that manufacturers need to make their goods point to the possibility of long-running output disruptions.

The BOJ, which next meets May 19-20, is supporting the economy by buying government bonds and private assets, such as corporate bonds and exchange-traded funds, via a pool of funds that was expanded to 10 trillion yen last month.

The BOJ has not ruled out buying more assets if quake-hit factories take longer to resume production than first thought.

The closure of another nuclear plant operated by Chubu Electric Power Co, a power supplier to the heart of the auto industry in central Japan, has cast further doubt on how quickly car makers can increase production.

(Additional reporting by Leika Kihara; Editing by Edmund Klamann and Chris Gallagher)