Japan posts record trade deficit, sluggish exports dim outlook

Japan suffered a record trade deficit in January as a weak yen pushed up the cost of imports and failed to substantially raise exports, suggesting that the trade-reliant economy faces a bumpy ride even as policymakers put on a brave face about the outlook.

The data followed on the heels of a survey showing manufacturers' sentiment worsened in January, underscoring the stiff challenges for Prime Minister Shinzo Abe's strategy to spark sustainable growth over the long run.

Ministry of Finance (MOF) data released on Thursday showed exports rose 9.5% in January but the effect of the softer yen on shipments was outweighed by a substantial rise in import costs. It also marked the third straight month of slower export growth.

The trade balance stood at a deficit of 2.79 trillion yen in January, the 19th straight month in the red, versus a 2.5 trillion yen shortfall expected by economists.

The ballooning deficit is a reminder that a weak yen alone cannot boost exports as Japanese firms are shifting production abroad, while overseas demand lacks strength needed to offset a blow from a sales tax hike in April.

A stumble in the economy could force policymakers to resort to further stimulus to prop up growth, although at this week's meeting the Bank of Japan ruled out the immediate need for more monetary steps.

"If the economy weakens further after a sales tax hike, policymakers could resort to fiscal stimulus as early as summer. The Bank of Japan could ease policy further later this year if it becomes clear that its 2% inflation target cannot be met," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

Adding to the recent run of soft data, a Reuters poll showed sentiment at Japanese manufacturers slipped in February for the first time in five months and is seen sliding further, a worrying sign the economy may be ill-equipped to cope with the tax hike without further stimulus.

Abe's reflationary policies have weakened the yen by about 20% in the year to January, supporting the value of export receipts in yen terms and helping exporters' earnings. But they have so far failed to shore up volumes.

The MOF data showed export volumes fell 0.2% in January from a year before.

The rise in exports undershot economists' estimate of a 12.6% gain, slowing from a 15.3% gain in the previous month. It marked an 11th straight month of export growth thanks to a weak yen and brisk car shipments.

Imports rose 25.0% year-on-year in January, against an expected rise of 21.8%, due in part to the weak yen and strong demand for fossil fuels to make up for nuclear power lost since the 2011 Fukushima crisis.

The last-minute demand before a sales tax hike in April may have helped boost imports while exports tend to slow in January due in part to New Year holidays, ministry officials said.

Analysts say the monthly trade deficits may narrow in coming months as a global recovery boosts export demand and a surge in consumer spending eases after the tax increase kicks in.

There are worries in some quarters that the trade shortfalls could pull the current account into the red in coming years, meaning that Japan may start chipping away at its vast pool of domestic savings and increasing the need to rein in its huge public debt.