UPDATE 1-Japan Aug current account surplus up on investment income

Mon Oct 8, 2012 8:33pm EDT

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* Current account surplus +4.2  pct vs forecast -2.5 pct
    * Japan's hefty holding of overseas assets offsets weak
exports
    * Outlook murky due to China's subdued growth, Europe debt
crisis

    TOKYO, Oct 9 (Reuters) - Japan's current account surplus
unexpectedly rose i n August from a year earlier due to an
increase in earnings on overseas investments, but sagging
exports due to the faltering Chinese economy and Europe's debt
crisis still cloud the outlook. 
    The 4.2 percent annual rise in the current account surplus
was the first in 18 months. It compared with the median estimate
for a 2.5 percent annual drop and followed a 40.6 percent
decline in the year to July.
    Although slackening global demand will likely continue to
weigh on exports, inflows from Japan's extensive holdings of
overseas assets are likely to keep the balance in surplus.
    But the surplus could narrow if China grows more slowly than
expected and the euro zone debt crisis further dampens demand
for Japanese goods. 
    "The overall trend is that the current account surplus is
likely to shrink in the future, because overseas economies are
weak and this will pressure exports," said Norio Miyagawa,
senior economist at Mizuho Research & Consulting Co.
    "The government may want to consider some extra measures to
support the economy, but it is unclear if the schedule in
parliament will lead to a quick response."   
   
    The current account, a broad measure of trade and other
investment flows, stood at 454.7 billion yen ($5.82 billion)
compared with economists' median forecast for 425.5 billion yen,
finance ministry data showed on Tuesday. 
    Japan's exports dropped for a third straight month in the
year to August while manufacturing sentiment hit its lowest
since February, more signs that weakening global demand is
taking its toll on the export-reliant economy.
    The economy has so far outperformed most of its peers in the
Group of Seven helped by spending on reconstruction from last
year's earthquake and tsunami. But economists polled by Reuters
say project growth will likely stall the rest of this year
because of weak external demand and a strong yen. 
    The Bank of Japan kept monetary policy unchanged last
Friday, but left the door open to more monetary easing later
this month by striking a pessimistic note on the state of the
world's third-largest economy. 
    The central bank is expected to cut its long-term economic
and price forecasts due out at the Oct. 30 review, and Japan
remains years away from achieving its 1 percent inflation
target, sources told Reuters.
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