June 8, 2011 / 2:00 AM / 8 years ago

UPDATE 3-Japan C/A slumps less than expected, recovery seen

* April current account surplus -69.5 pct yr/yr vs forecast -84.3 pct

* Japan likely to avoid current account deficit as exports recover

* Signs of recovery from disaster could keep Bank of Japan on hold

* Japan logs big trade deficit in May 1-20

* Government survey shows improvement in service sector sentiment (Updates with service survey)

By Rie Ishiguro and Kaori Kaneko

TOKYO, June 8 (Reuters) - Japan’s current account surplus fell less than expected in April from a year earlier, fuelling further hopes for an early economic recovery as manufacturers restore lost production and mend supply chains after the March disaster.

The data suggested that Japan will avoid a current account deficit as exports were recovering and income from overseas investments steadily flowed in.

Bank lending in the year to May fell at the slowest rate in 18 months as some companies sought extra funds to cope with the disaster, central bank showed. In addition, a monthly government survey showed service sector sentiment improved in May.

The poll of service sector workers such as taxi drivers, hotel workers and restaurant staff — called “economy watchers” for their proximity to consumer and retail trends — also showed they were more optimistic about the future. [ID:T9E7GR00A]

Wednesday’s data added to evidence that Japanese industry is recovering faster than initially anticipated from a 9.0 magnitude earthquake and a tsunami that slammed the northeast coast on March 11, triggering meltdowns at a nuclear power plant.

This makes it more likely that the world’s third-largest economy will pull out from a brief recession caused by the disaster and resume growing in the second half of the year, reducing the need for additional easing by the Bank of Japan.

“We can expect a recovery in production at Japanese manufacturers from here on, so the current account surplus isn’t likely to worsen further,” said Shuji Tonouchi, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“There are still risks to the outlook, such as signs of a slowdown in overseas economies. This is something that the Bank of Japan is likely to watch closely, but for the time being the BOJ will keep monetary policy on hold as it wants to confirm how quickly Japanese production will recover.”

Japan’s current account surplus fell 69.5 percent in April from a year earlier, Ministry of Finance data showed, less than the median forecast for an 84.3 percent annual decline, although exceeding the 34.3 percent annual drop in March.

The surplus stood at 405.6 billion yen ($5 billion), nearly double the median forecast of 210 billion yen, as big gains in dividend income from abroad more than offset deficits in trade of goods and services.

Outstanding loans held by Japanese banks inched down 0.7 percent in May from a year earlier, central bank data showed. Lending fell for an 18th straight month, but the decline slowed, suggesting the March earthquake and tsunami supported corporate demand for funding.

Some analysts said that, despite signs of improvement in production and exports, the trade deficit may widen in the coming months on demand for oil and gas to make up for the nuclear energy loss.

Separate data showed Japan had a trade deficit exceeding 1 trillion yen in the first three weeks of May, suggesting it is set to log a deficit for a second consecutive month partly on growth in oil and gas imports.

Japan’s gross domestic product probably shrank an annualised 3.0 percent in the first quarter, less than a preliminary estimate of a 3.7 percent decline, as inventories and corporate spending fell less than initially reported, according to a Reuters poll. The revised data is due at 8:50 a.m. on June 9 (2350 GMT on June 8). [ID:nL3E7H31UM]

Analysts expect the economy to shrink again in April-June, which would mark three consecutive quarters of decline, and then resume growing in the second half of the year as exports recover.

The Bank of Japan eased monetary policy just days after the March earthquake, but it has stood pat on policy since then on the view that the economy will resume a moderate recovery before the end of the year. ($1 = 80.075 Japanese Yen) (Additional reporting by Kaori Kaneko, Writing by Tomasz Janowski; Editing by Edmund Klamann)

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