Japan trade surplus narrows as China demand slows

[HenryTo]

The Japanese consumers and private investment will have to take up the slack at some point or else the Nikkei is definitely going back below 11,000 and sooner rather than later:
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Wednesday June 22, 10:03 AM
Japan trade surplus narrows as China demand slows
TOKYO, June 22 (Reuters) - Japan's trade surplus in May narrowed from a year earlier for the fourth time in five months as exports to China slowed and higher oil prices inflated imports, casting a shadow over Japan's growth prospects.

The surplus last month fell to 297.0 billion yen ($2.74 billion), down 68.3 percent from a year earlier, the largest monthly drop since May 2001. It was scarcely half the median forecast by 25 economists for a surplus of 510 billion yen.

On a seasonally adjusted basis, the surplus fell 1.0 percent from April, Finance Ministry data showed on Wednesday.

Exports rose only 1.4 percent from a year earlier, compared with a forecast of 6.0 percent, with shipments to China -- now Japan's biggest trade partner and one of the main factors behind the country's economic recovery in the last several years -- down 0.1 percent.

Exports to China fell in February from a year earlier for the first time in four years, but economists at the time suspected the timing of the Lunar New Year holidays might be responsible. Now they are concerned that a slowdown is undeniable after 20 percent growth in exports to China in 2004.

"It may be that a slowdown in Chinese demand is becoming more evident," said Seiji Adachi, senior economist at Deutsche Securities.

After the data, Japanese government bond (JGB) prices jumped, with the 10-year JGB futures rising 0.20 point to 140.05.

The Tokyo stock market's Nikkei average was nearly flat in morning trade. The yen was little changed near 108.50 to the dollar.

Exports to China -- which account for 13 percent of Japan's global exports, second only to 22 percent for the United States -- have clearly slowed this year as Beijing sought to cool overheating in parts of its economy, denting demand for raw materials and machinery.

Anti-Japan protests that flared up across China in April may also have had some impact as some demonstrators called for a boycott of Japanese products, although a Finance Ministry official said it was hard to determine the impact so far.

Falling exports to China were led by automobiles and semiconductor parts, which could be due in part to structural changes.

"More automobiles seem to be produced domestically and supplied to the market," the ministry official said. "As for IT-related products, there seem to be more cases where Japanese firms are operating in China."

Rising oil prices inflated imports and caused the surplus to narrow. Crude oil imports were up 64.9 percent while oil product imports were up 72.6 percent.

The crude oil price used for the May data was a record-high $51.10 per barrel, compared with $34.40 a year earlier.

U.S. crude oil futures hit a record $59.70 on Tuesday.

The gloomy exports picture casts a shadow over Japan's growth prospects. Although strong growth in the first three months of the year stemmed from strong domestic demand, many economists see export growth and a resultant boost to production and corporate earnings as key to a sustained economic recovery.

Japan's economy expanded a real 1.2 percent in January-March from the previous quarter, bolstered by capital spending and personal consumption, while soft external demand dragged growth down for a third straight quarter.

"The trade balance already hit a peak last year, and the contribution from net exports to GDP will be very weak in the second quarter after being very weak in the first quarter," said Kiichi Murashima, an economist at Nikko Citigroup.

"The big picture is that private consumption and investment are supporting growth in Japan."