Export Growth Slows, Underscoring Japan Recovery's Vulnerability to Trade

Japan’s export growth slowed for a third month in May, signaling the pace of the economic recovery is likely to cool.

Shipments abroad advanced 32.1 percent from a year earlier, less than April’s 40.4 percent, the Finance Ministry said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for 36.5 percent. From the previous month, exports fell a seasonally adjusted 1.2 percent.

The report highlights the vulnerability of Japan to any slowdown in global trade after exports drove the economy’s 5 percent annualized expansion in the first quarter. Bank of Japan Deputy Governor Kiyohiko Nishimura said yesterday that policy makers need to monitor whether Europe’s sovereign debt crisis will start to affect Japan.

“It will be difficult to maintain the same recovery pace in the coming months,” said Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA. “Looking ahead, export growth will likely slow as there’s still uncertainty surrounding the global financial markets.”

The yen has climbed against all 16 major currencies this quarter, threatening the competitiveness of Japanese exporters.

Japan’s currency traded at 89.92 per dollar at 11:05 a.m. in Tokyo after gaining yesterday as the Federal Reserve maintained its pledge to keep interest rates near zero and signaled that Europe’s debt woes may harm the U.S. expansion. The Nikkei 225 Stock Average rose 0.2 percent. The yield on Japan’s 10-year bond fell two basis points to 1.145 percent, after earlier touching the lowest level since August 2003.

Yen Concern

Japanese executives this month voiced concern about the yen’s advance. The effect of currency gains on companies is “huge” and volatile exchange-rate movements are the “worst thing” that can happen, Hiromasa Yonekura, head of Japan’s Keidanren business lobby, said in Tokyo on June 7.

Imports climbed 33.4 percent in May from a year earlier, leaving a trade surplus of 324.2 billion yen ($3.6 billion), the ministry said. The median estimate of economists was for a 480 billion yen excess.

Growth in exports to all of Japan’s three major markets slowed in May, today’s report showed. The value of shipments to China, Japan’s biggest market, climbed 25.3 percent from a year earlier, moderating from 41.3 percent in April. Exports to the U.S. advanced 17.7 percent, about half the pace of the previous month’s 34.4 percent. Shipments to Europe increased 17.4 percent, compared with 19.9 percent in April.

Signs of Moderation

“We are starting to see some moderation,” though overseas demand will continue to support the recovery, said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “We may start to see a more serious slowdown toward the end of the year” as stimulus boosts fade and production cycles peak in economies abroad, he said.

Prime Minister Naoto Kan has over the past week released plans for boosting economic growth as well as shrinking the budget deficit to contain the world’s biggest public debt. The Cabinet Office raised its economic growth forecast this week to 2.6 percent from 1.4 percent for the year ending March 31. That would be the fastest expansion in a decade.

“We are observing signs of increasing exports and output spreading to domestic private demand,” Deputy Governor Nishimura said in a speech in Tokyo yesterday. Still, he added, “there are uncertainties about the economy’s outlook, both on the upside and downside.”

Elpida Memory

Sales to China have led a revival of business for Japanese exporters. Elpida Memory Inc., Japan’s sole maker of computer- memory chips, plans to build factories in Taiwan and China to meet demand, President Yukio Sakamoto said this month. He expects record sales and profit this fiscal year.

As well as the European crisis, efforts by China to prevent its economy from overheating pose a risk to Japan’s exports, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. China has increased bank reserve ratio requirements three times this year and on June 19 moved toward allowing a more flexible currency.

Today’s report “confirmed that the gradual export- led recovery continued in May,” Ueno said. “But there are risks down the road.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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