Aug. 21 (Bloomberg) -- Japan's exports rebounded in July as China replaced the U.S. as the nation's largest customer.

Shipments overseas rose 8.1 percent from a year earlier, after declining for the first time since 2003 in June, the Finance Ministry said today in Tokyo. Exports to China climbed 16.8 percent and shipments to the U.S. slumped 11.5 percent.

Honda Motor Co. and Komatsu Ltd. are turning to China, the world's fastest-growing major economy, as the U.S. slowdown intensifies and rising fuel and food costs weaken demand at home. Higher oil prices caused the import bill to climb to a record last month, triggering an 87 percent drop in the trade surplus.

``China's emergence is a reminder to Japanese exporters that they'll have to keep thinking how to expand in emerging markets, having previously focused on the U.S.,'' said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. ``Still, demand from China won't be strong enough to boost exports when the global economy is slowing.''

The yen traded at 109.64 per dollar as of 12:17 p.m. in Tokyo from 109.75 before the report. The median estimate of 18 economists surveyed was for exports to increase 5.3 percent.

The Bank of Japan this week described growth as ``sluggish'' for the first time in a decade, citing weakening exports as well as higher commodity costs. The biggest drop in shipments abroad in seven years caused the economy to shrink at an annual 2.4 percent pace last quarter, robbing Japan of the main driver of its longest postwar expansion.

`Slowing Phase'

``The global economy has entered a slowing phase, so the trend will be for growth in exports to slow,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``The worsening terms of trade may continue to be a blow to the economy.''

Imports surged 18.2 percent last month, the fastest pace in two years, narrowing the trade surplus to 91.1 billion yen ($830 million). Oil climbed to a record $147 a barrel in July. Japan imports virtually all of its fuel.

Exports to China rose to a record 1.29 trillion yen, exceeding the value of those sent to the U.S. for the first time since the government began compiling monthly figures in 1950, the ministry said. Shipments to the U.S. fell to 1.28 trillion yen, the 11th monthly decline.

Goods shipped to Asia advanced 12.7 percent to 3.86 trillion yen, the highest ever, and exports to Europe gained 4.1 percent, the first increase in three months.

Honda, Komatsu

Honda's growth in China and Russia will help counter higher costs for steel and other raw materials, the automaker's Chief Financial Officer Yoichi Hojo said last month. Komatsu, Japan's biggest maker of earthmovers, reported in July that sales in China gained 37 percent last quarter, while revenue in North and South America slid 2.8 percent.

Even demand from Asia, the destination of about half of Japan's goods sent overseas, waned this year as accelerating inflation prompted central banks from South Korea to India to raise interest rates, slowing growth in the region.

``The rise in exports doesn't necessarily mean they're solid,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. ``It just shows exports are going to slow gradually rather than drastically as demand from Asia and Europe weakens.''

Toyota Motor Corp., Japan's biggest company, this month reported its biggest earnings decline in five years as U.S. sales slumped. The automaker on Aug. 7 scrapped its goal of selling 10.4 million vehicles in 2009.

``Growth in exports is expected to remain only modest for the time being, due to the slowdown in overseas economies,'' the Bank of Japan said in its monthly report yesterday.

Still, the central bank also said growth will pick up as commodity prices ``level out'' and the global economy recovers. Oil has dropped 20 percent since its July 11 peak.

``If the recent decline in commodity prices is sustained, then it should allow growth in Japan's major export markets to pick up in 2009,'' said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

Last Updated: August 20, 2008 23:30 EDT