Japan May exports disappoint, cloud growth outlook

A worker rides a bicycle in a container area at a port in Tokyo May 21, 2014. Japan's exports suffered their first annual decline that month. -- PHOTO: REUTERS 
A worker rides a bicycle in a container area at a port in Tokyo May 21, 2014. Japan's exports suffered their first annual decline that month. -- PHOTO: REUTERS 

TOKYO (Reuters) - Japan's exports suffered their first annual decline in 15 months in May as external demand remained soft despite a recovery in advanced economies, suggesting a bumpy ride for the world's third-largest economy.

Exports to Asia and the United States fell during the month, Ministry of Finance data released on Wednesday showed, which is likely to heighten concerns about Japan's growth outlook at a time when consumption is being crimped by a national sales tax increase.

Exports fell 2.7 per cent in the year to May, the MOF data showed, compared with a 1.2 per cent drop seen by economists and a 5.1 per cent rise in April. On a seasonally adjusted basis, exports fell 1.2 per cent in May from the prior month.

The data will be a worry for Bank of Japan Governor Haruhiko Kuroda who last week said the timing of export recovery may have been delayed.

The BOJ is counting on exports growth to partially offset the impact of a sales tax hike to 8 per cent from 5 per cent in April, and sees shipments eventually picking up as overseas economies, mainly advanced economies, recover.

However, the recent signs suggest that external demand is slow to pick up.

"The mechanism where exports drive activity in the manufacturing sector is not working, so this cannot offset the impact from the sales tax hike," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management.

"The U.S. economy is improving, so Japan's exports will eventually recover, but it will take more time." Exports to the United States decreased 2.8 per cent, while shipments to China rose 0.4 per cent in the year to May.

Exports to Asia, which account for more than half of Japan's total exports, fell 3.4 per cent in May from a year earlier.

The MOF data indicates weakness in external demand is more prevalent in the region than some had thought.

Singapore's exports unexpectedly fell in May on weak shipments of electronics and pharmaceuticals to its key markets, data showed on Tuesday, indicating the city-state may not be benefiting yet from a recovery in developed economies.

Japan's economy picked up speed in the first quarter as consumers loaded up on goods ahead of the tax hike, but growth is expected to slump in the current quarter as the effects of the one-off consumption spike winds back. An extended period of weak shipments could hit the economy hard, which analysts say could prompt the BOJ into additional easing measures.

Japan's imports fell 3.6 per cent in the year to May, versus a 1.7 percent increase expected, bringing its trade balance to a deficit of 909 billion yen (S$11.2 billion), the MOF data showed.

That compared with an expected shortfall of 1.17 trillion yen, and marked a record run of 23 months in the red.

Japan's exports had grown at a double-digit pace in the second half of last year, but growth has slowed to below 10 per cent this year as the effects of a weak yen fade.

Export volumes also fell 3.4 per cent in May from a year ago, highlighting the plight of exporters as a weak yen has boosted import costs more than export income.

BOJ's aggressive monetary stimulus helped weaken the yen by some 20 per cent last year, boosting exporters' profits and share prices. However, the yen has moved sideways this year versus the dollar, limiting gains in the value of exports.

The central bank kept monetary policy steady last week and offered a more upbeat view on overseas growth, signalling confidence the economy is on course to meet its inflation target next year without additional stimulus.