Export slowdown could weigh on Japan's Q2 GDP growth

Weak external demand could erode economic growth in current quarter

Japan’s export growth slowed for a second straight month in May, with weak external demand now threatening to erode economic growth in the current quarter.

Ministry of Finance (MOF) data showed exports grew 2.4 per cent year-on-year in May, less than a 3.5 per cent gain seen by economists and a eight per cent rise in the prior month. Compared with April, exports fell 2.7 per cent.

Export growth, in tandem with domestic demand, is seen as crucial for building on the momentum evident from recent data showing stronger-than-expected economic expansion - led by corporate capital expenditure at the start of the year.

The data will be scrutinized by the Bank of Japan, which is expected to keep its monetary stimulus program unchanged at its policy review later this week, after having offered a slightly more upbeat view of the economy last month. “Exports are undoubtedly weak and the momentum is stalling due to slowdown in China,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“Exports are likely to keep a drag on economic growth, which could grind to a halt or turn negative in the current quarter given weak private consumption and external demand.”

The Japanese currency hit a 13-year low above 125 yen to the dollar Japanese yen = this month before gaining some ground, down about 20 per cent for the year.

But weak external demand caused export volume to fall 3.8 per cent in the year to May, with the volume of car shipments declining for the first time in six months.

Shipments to China, Japan’s largest trading partner, grew 1.1 per cent, slowing from a 2.4 per cent gain in April. China-bound car exports nearly halved from a year ago.

Exports to Asia, which account for more than half of Japan’s shipments, rose 3.3 per cent, after a six percent gain in April.

Exports to the United States, a key market for Japanese goods, rose 7.4 per cent in the year to May, slowing sharply from the prior month’s 21.3 per cent gain. US-bound export volume fell for the first time in six months.

Imports fell 8.7 per cent in the year to May to below 6 trillion yen ($48.61 billion), the lowest since December 2012, due to annual declines in energy prices.

That brought the trade balance to a deficit of 216 billion Japanese yen, roughly in line with a 226.0 billion yen deficit expected.

Revised gross domestic product data this month showed external demand knocked 0.2 per cent off first-quarter economic growth as imports outpaced exports, even though the economy had shown unusually strong annualized growth.

“To be sure, output expanded at an annualized rate of 3.9 per cent last quarter. But we think that growth will slow sharply in the second quarter,” Capital Economics said in a note.

“Firms’ projections for industrial production, which tend to overstate the future strength of output, suggest that GDP may have stagnated in Q2. We expect growth to remain tepid in the second half of the year.”