Japan trade surplus hit by oil, exports a worry

www.stuff.co.nz 28 January 2003

TOKYO: Japan's trade surplus rose by an unexpectedly small amount in December, with higher oil prices pushing up the cost of imports and exports showing weakness in what could be a worrying sign for the struggling economy.

The Ministry of Finance said yesterday that the customs-cleared surplus rose 19.9 per cent from a year earlier to 791 billion yen ($NZ12.40 billion).

But exports fell 7.3 per cent from November and the rise in the surplus was lower than a median forecast of about 40 per cent to 920 billion yen by economists polled last week.

Economists said rising oil prices due to a looming conflict in Iraq and a crippling strike in Venezuela were partly to blame for the smaller-than-expected surplus, but added that exports - one of Japan's few economic bright spots - were also a concern.

"The trade gap was narrower than our forecasts due to a steep rise in imports, mainly because of the rise in oil prices," said Takeshi Minami, a senior economist at UFJ Tsubasa Securities.

"The outlook for the domestic economy remains bearish, as today's figures give clear evidence that exports are falling."

The futures market price of Brent crude has surged to above $US30 ($NZ55) per barrel from below $US23 in mid-November, and could head even higher if a US-led war against Iraq breaks out.

With Japan depending heavily on Middle East oil, the price rises helped push up imports by 1.2 per cent from a month earlier and by 14.1 per cent from a year earlier to 3.769 trillion yen .

Separate data from the Finance Ministry showed that the value of Japan's customs-cleared imports of crude oil totalled a preliminary 492.858 billion yen in December, up a hefty 51.3 per cent from a year earlier.

Despite falling from the previous month, exports rose on a year-on-year basis for the ninth straight month, gaining 15.1 per cent to 4.560 trillion yen.

A rebound in exports helped drag Japan out of its worst postwar recession early last year and had appeared to be holding up, despite a pause around the third quarter of 2002.

But the overall economy, beset by persistent deflation, a mountain of corporate bad loans and puny domestic demand, has failed to maintain its momentum.

"Looking at the export volumes... they're still pretty strong. Total export volumes were up 13.5 per cent on the year, and exports to Asia were also very strong," said Matthew Poggi, an economist at Lehman Brothers.

"So while our forecast calls for somewhat slower external demand, it doesn't look like it's showing up in the trade numbers just yet. But certainly it's a concern going forward," he added.

For the whole of calendar 2002, the trade surplus rose 51.3 per cent from the previous year to 9.930 trillion yen, with exports up 6.4 per cent and imports down 0.6 per cent.

Industrial production figures out later this week are expected to show that output shrank in the October-December period for the first time in four quarters, boding ill for GDP figures for the period due out on February 14.

Some economists say Japan may be heading into its fourth recession in a decade, although the consensus view is for a period of meagre growth for at least the first half of this calendar year.

A major risk to that scenario is the looming US-led war in Iraq.

By raising the price of the imported oil Japan depends on, a conflict in the Gulf could damage growth prospects. Expectations of a war have already weakened the dollar against the yen, making Japanese exports less competitive.

The yen was around 117.90 yen per $US by mid-morning yesterday. Its climb from around 125 yen in early December has brought frequent threats of intervention from Japanese Finance Ministry officials.