Japan exports tepid; business mood steady before sales tax hike

A port in Tokyo in February 2014. Japan's annual export growth in February was well below market expectations, but business confidence remained steady over the month - although that may not last too long. -- FILE PHOTO: REUTERS
A port in Tokyo in February 2014. Japan's annual export growth in February was well below market expectations, but business confidence remained steady over the month - although that may not last too long. -- FILE PHOTO: REUTERS

TOKYO (REUTERS) - Japan's annual export growth in February was well below market expectations, but business confidence remained steady over the month - although that may not last too long.

Ministry of Finance (MOF) data showed that exports rose 9.8 per cent in February from a year earlier, following a 9.5 per cent annual gain in the previous month, as shipments to China and Asia recovered from a Lunar New Year slowdown.

The modest rise in exports compared with a 12.4 per cent gain expected by economists in a Reuters poll, with US-bound shipments slowing sharply, possibly due to a cold wave there.

In terms of volume, exports increased 5.4 per cent in February.

Export weakness was not reflected in confidence at Japanese manufacturers, which held steady at plus 18 in March and non-manufacturers' mood edged up to a record high of plus 31 as consumers brought forward purchases to beat an April 1 sales tax rise, a Reuters poll found on Wednesday.

However, the monthly Reuters survey, which closely correlates with the Bank of Japan's tankan, showed both sectors'sentiment indexes are expected to slide to plus 12 and plus 14 respectively in June.

Despite a sharp fall in the yen since late 2012, which has pushed up the cost of imports, there has not been a equivalent boost in exports, in part because of exporters'reluctance to cut prices.

Slower-than-expected export growth could be a concern for policymakers, who are counting on shipments to help cushion an expected dent in domestic activity from next month when the sales tax rate rises to 8 per cent from the current 5 per cent.

Imports grew 9.0 per cent in the year to February, versus an annual 7.4 per cent gain expected, resulting in a trade gap of 800.3 billion yen (S$9.96 billion), although well below January's record trade gap of 2.79 trillion yen, the data showed.

The weakness of exports - a key driver of the Japanese economy - has been a worry for policymakers despite a soft yen, which has boosted import costs more than it promoted exports, leading to a record 20th straight month of trade deficits.

"Overall, exports remain sluggish and the situation is severe," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"Considering that one cannot expect 4-5 percent growth in the United States and Chinese growth remains tepid, both of which will weigh on Asian economies and Japan's exports. You cannot rely on such a rosy scenario that exports could offset the impact of a sales tax hike."

Lack of export growth could compel the central bank to adopt further monetary stimulus, and the government may resort to more fiscal stimulus to prop up the economy as soon as the summer, Minami said.

POLL'S WORSENING SENTIMENT A total of 255 firms responded to the Reuters poll of 400 big- and medium-sized firms taken March 3-14. Indexes are calculated by subtracting the percentage of pessimistic responses from optimistic ones.

The BOJ will release its March quarter tankan on April 1, the same day the sales tax rises to 8 percent from 5 percent.

Any weakness in the BOJ tankan would increase calls for additional stimulus from the BOJ, even though the central bank has said the economy should be able to weather the tax rise.

At a policy review last week, the BOJ maintained its massive monetary stimulus and kept its upbeat view on the economy, although it downgraded its assessment of exports, saying that they have levelled off.

Policymakers and many private-sector economists expect the economy to slow temporarily in the April-June quarter after the tax rise, before rebounding in July-September.

($1 = 101.3650 Japanese yen) (Editing by Eric Meijer) Reuters 2014-03-19T01:41:06.000Z(VersionCreatedDate) 2014-03-19T014106Z-2132537769-L3N0ME170-RTRMADT-0-JAPAN-ECONOMY-UPDATE-1.txt nnnn