TOKYO Japan logged a record annual trade deficit in 2012 as exports extended a slide in December, signaling that Prime Minister Shinzo Abe's efforts to weaken the yen have been slow to gain traction.
A Reuters monthly poll showed Japanese manufacturing sentiment is improving but the 2012 trade gap of 6.93 trillion yen ($78.27 billion) and a seventh consecutive monthly drop in exports show that has yet to translate into hard economic data.
The second consecutive annual trade deficit recorded by a nation that for decades had racked up hefty surpluses, helping to finance its ballooning debt, underlines the need for Abe's government to strike a balance between economic growth and fiscal reform.
The 2011 shortfall was the first annual trade deficit since 1980, as exports struggled and Japan shifted away from nuclear power in favor of fossil fuels after the March 2011 earthquake, tsunami and subsequent nuclear crisis.
The December data, however, is seen as the low point and analysts expect the economy to gradually regain momentum this year. A Reuters poll shows the trade deficit is expected to narrow in the year ending March 2014 to 5.6 trillion yen from 6.2 trillion yen in the year ending March 2013.
"I don't think the shortfall will persist as a trend," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
"As the U.S. and Chinese economies pick up and the yen weakens, Japan's trade balance will return to surplus by around the end of this year."
The data from the Finance ministry on Thursday showed that exports fell 5.8 percent in the year to December, more than economists' consensus forecast of a 4.2 percent drop.
Imports rose 1.9 percent, against a projected 1.5 percent increase, resulting in a trade deficit of 641.5 billion yen compared with a forecast deficit of 534.0 billion yen, and marking a sixth straight month of trade deficits.
Japan's exports have continued to weaken even though the yen started to fall sharply in November in expectations of bold central bank stimulus to pull the world's third-biggest economy out of its fourth recession since 2000.
Since early November the yen has fallen 11 percent against the dollar and 15 percent against the euro.
The Bank of Japan on Tuesday doubled its inflation target to 2 percent and made an open-ended commitment to buy assets from next year after weeks of relentless pressure from Abe for a greater push to combat deflation.
Earlier this month, the cabinet approved $117 billion in extra spending in the biggest stimulus since the global financial crisis to try to lift the economy.
Still, some signs of economic improvement are emerging.
A Reuters monthly poll, released on Thursday and which closely correlates to the BOJ's tankan survey, showed the manufacturers' sentiment index rose by a point to minus 17 in January, up 2 points from a three-year low registered in November.
Although a minus figure represents pessimism, the survey also showed that the index is expected to swing to plus 1 in April, meaning optimists outnumber pessimists. Respondents cited the weakening yen as one reason for their improved sentiment.
Analysts expect exports and the broader economy will pick up gradually along with the global recovery, helped by the yen's weakening due to the Bank of Japan's continued monetary easing and Abe's expansionary budget policy.
In an encouraging signal for the export-reliant economy, manufacturing in the United States and China - two major markets for Japanese shipments - grew in December, suggesting the global economy was on course for moderate growth this year.
However, the sharp decline in the yen is raising concerns outside of Japan.
Bahk Jae-won, the finance minister of South Korea, which competes head on with Japan in areas such as autos, said on Thursday that the BOJ's policy expansion would be an issue for discussion at the Group of 20. G20 finance leaders are due to meet next month.
South Korea's Hyundai Motor Co (005380.KS) posted a surprise profit fall on Thursday, saying the strength of the Korean won and weakness of the yen hit its price competitiveness.
European Central Bank policymaker Jens Weidmann cited the Bank of Japan on Monday as an example of increasing pressure on central banks for more aggressive policies, which can lead to "an increased politicization of exchange rates.
"One may argue Japan may be promoting beggar-thy-neighbor policy by weakening the yen," said Junko Nishioka, chief Japan economist at RBS Securities.
"But considering how the U.S. has weakened the dollar to boost exports in the past few years, Japan should not be criticized by name."
(Editing by Tomasz Janowski, Edmund Klamann and Neil Fullick)