TOKYO Confidence among Japanese manufacturers slipped in September from a three-year high on worries about a slowdown in emerging markets, although the fastest growth in exports since late 2010 suggested the economy is still building momentum.
Prime Minister Shinzo Abe's reflationary policies and central bank stimulus weakened the yen through much of the first half of 2013, and exports look to be benefiting from that as demand starts to pick up in major economies.
But the weaker yen also increased the import bill and pushed the trade balance into a 14th successive deficit in August, matching a record streak in 1979/80 and suggesting the old export-led model of growth needs to be reviewed.
"I cannot foresee an end to trade deficits, although exports will continue to pick up due to a weak yen and improvement in Europe," said Takuya Hoshino, economist at Dai-ichi Life Research Institute.
"Business sentiment was down reflecting slowdown in emerging economies and the impact of a weak yen boosting import costs, but still it is at high levels. Today's data confirms an economic recovery continuing towards early next year."
A monthly Reuters poll, which is strongly correlated with the Bank of Japan's tankan poll, showed sentiment among manufacturers fell to plus 12 in September, its lowest since May, from a three-year high of 16 in August.
The index is seen rebounding to plus 19 in December, according to the poll of 400 large and medium-size firms, of which 275 responded between August 30-September 13.
Data from the Ministry of Finance showed exports rose 14.7 percent in the year to August, in line with market expectations and their fastest growth since August 2010, led by shipments of cars to the United States.
Imports rose 16.0 percent, below expectations, as the weaker yen compounded higher demand for fossil fuel after Japan shuttered its nuclear power plants following the Fukushima crisis.
That led to a trade deficit of 960.3 billion yen ($9.7 billion for August.
In the Reuters Tankan, the manufacturers' index was down 3 points from three months earlier, while the service-sector index was unchanged, pointing to tepid gains in the BOJ's closely-watched quarterly tankan survey, due on October 1.
Growth prospects of emerging markets had been hit by an outflow of capital in recent months on signs the U.S. Federal Reserve was readying to trim its monetary stimulus. On Wednesday, the Fed said it would maintain its stimulus.
The BOJ's tankan in July showed manufacturers' mood turned positive in April-June for the first time in nearly two years, and was seen rising further.
The central bank upgraded its assessment of the economy earlier this month to say it was recovering moderately. In the Reuters Tankan, however, many firms said they did not feel a fully fledged recovery was taking hold.
"The economy may be in a recovery trend, but people in the medium- to low-income group are tightening their belt amid worry about sales tax hikes while their incomes have hardly improved," a textile product maker said in the Reuters poll.
The economy grew an annualised 3.8 percent in the second quarter, driven in large part by strong consumer spending, boosting the case for Abe to go ahead with a planned sales tax hike next year.
The BOJ's tankan will be one of the factors Abe considers before an expected decision on the sales tax in early October.
($1 = 98.9400 Japanese yen)
(Additional reporting by Izumi Nakagawa; Editing by John Mair)