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UPDATE 3 -Record Japan trade deficit highlights risk of economic stumble
February 20, 2014 / 1:35 AM / 4 years ago

UPDATE 3 -Record Japan trade deficit highlights risk of economic stumble

* January exports +9.5 pct yr/yr, imports +25.0 pct yr/yr
    * Monthly trade deficit hits record 2.8 trillion yen
    * Manufacturers' sentiment down for 1st time in 5 months
    * Business mood seen sliding sharply after sales tax hike

    By Tetsushi Kajimoto and Stanley White
    TOKYO/WAKAYAMA, JAPAN Feb 20 (Reuters) - Japan suffered a
record trade deficit in January as growth in exports spurred by
a weak yen was far outstripped by a surge in import costs,
raising fresh doubts about Prime Minister Shinzo Abe's strategy
to spark an economic revival. 
    The trade numbers came on the heels of a survey showing
manufacturers' sentiment worsened in February in a sign that
businesses were bracing for a chill in demand after a planned
sales tax increase takes effect in April.
    The drumbeat of disappointing data threatens to slam the
brakes on the world's third-largest economy barely a year after
Abe set about recharging growth with a potent mix of fiscal and
monetary stimulus.
    Exports rose 9.5 percent in January, Ministry of Finance
(MOF) data released on Thursday showed, though growth slowed for
the third straight month with the effect of the softer yen on
shipments outweighed by a substantial rise in import costs.
    The trade balance came to a deficit of 2.79 trillion yen
($27.30 billion) in January -- a record 19th straight month of
shortfalls -- as imports rose 25 percent to a record amount.
    The ballooning deficit is a reminder that a weak yen alone
cannot boost exports as Japanese firms are shifting production
abroad, while overseas demand lacks strength needed to offset a
blow from the planned sales tax hike.
    A stumble in the economy could force policymakers to resort
to further stimulus to prop up growth, although at this week's
meeting the Bank of Japan ruled out the immediate need for more
monetary steps. 
    The BOJ's stance was reiterated again on Thursday by board
member Yoshihisa Morimoto, who said the economy can continue to
exceed its potential growth rate even after the tax increase.
    Morimoto, a former utility executive, stuck to the BOJ's
assessment that Japan's economy was headed for a moderate
recovery and making steady progress toward achieving the central
bank's 2 percent inflation target.
    Still, many analysts were guarded about the near term
    "If the economy weakens further after a sales tax hike,
policymakers could resort to fiscal stimulus as early as summer.
The BOJ could ease policy further later this year if it becomes
clear that its 2 percent inflation target cannot be met," said
Yasuo Yamamoto, senior economist at Mizuho Research Institute.
    Morimoto, speaking to reporters, acknowledged that exports
have been weak but added that this was not enough to constitute
a risk to Japan's economy.
    Morimoto also said that if the BOJ felt it had to change its
forecasts it would adjust policy proactively and the central
bank was not limited to reacting to changes in economic data.
    On Monday, data showed the economy grew at a much slower
pace than expected as exports, consumption and business
investment disappointed. 
    Worryingly, a Reuters poll showed sentiment at Japanese
manufacturers slipped in February for the first time in five
months and was seen sliding further, a sign the economy may be
ill-equipped to cope with the tax hike without further stimulus.
    Much of Abe's strategy is reliant on companies buying into
the view that the economy has enough momentum to break years of
stubborn deflation and slack demand, spurring higher wages,
consumption and growth.    
    But with the economy having to steer through speed bumps,
including from the April tax rise, the Federal Reserve's
tapering of its stimulus and stress in emerging markets,
businesses remain cautious.  
    Companies surveyed also voiced concern about weak shipments
to China and risks from emerging market economies which are key
markets for Japanese goods.
    "It will take time for overall demand to recover," a
nonferrous metals company said in the Reuters survey.
    One retailer said: "Construction demand before a sales tax
hike has been brisk, but other goods are not selling well."
    Abe's reflationary policies have weakened the yen by about 
20 percent in the year to January, supporting the value of
export receipts in yen terms and helping exporters' earnings.
But they have so far failed to shore up volumes. 
    The MOF data showed export volumes fell 0.2 percent in
January from a year before.
    Underscoring flagging shipments, the Reuters poll also
showed the manufacturers' mood was dampened by electric
machinery and precision machinery industries -- two key export
    Government officials said last-minute demand before a sales
tax increase in April helped boost imports while exports tend to
slow in January due in part to New Year holidays. 
    The government will increase the sales tax in April to 8
percent from 5 percent, and consumers have been buying cars,
homes and durable goods before the increase.
    Imports have been pushed up by the weak yen and strong
demand for fossil fuels to make up for nuclear power lost since
the 2011 Fukushima crisis.
    Analysts say the monthly trade gaps may narrow in coming
months as a global recovery boosts export demand and a surge in
consumer spending eases after the tax increase kicks in.
    There are worries in some quarters that the trade shortfalls
could pull the current account into the red in coming years,
meaning that Japan may start chipping away at its vast pool of
domestic savings and increasing the need to rein in its huge
public debt.

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