Japan exports slow sharply in February but beat expectations

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Japan's exports rose at a faster-than-expected pace in February but slowed sharply from the previous month as exports to China waned amid the Lunar New Year holidays.

Exports rose 2.4 percent on year, Ministry of Finance data showed on Wednesday, above expectations for a 0.3 percent increase in a Reuters poll, but down from a 17 percent on-year rise in January.

Despite the above-view reading, exports were sharply lower compared to January's reading largely due to 17.3 percent on-year drop in exports to China, which celebrated the Lunar New Year holiday during February.

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"A plunge in export volumes offset another decline in the cost of oil imports. Net exports should therefore become a drag on [gross domestic product] growth soon," Marcel Thieliant, Japan economist at Capital Economics, said in a note.

But Mizuho Bank analysts were more optimistic.

"We think this supports the [Bank of Japan's] view of an ongoing, gradual recovery, underpinning its decision to withhold from adding further stimulus even as [central bank governor] Kuroda expresses his view that inflation might turn negative due to oil prices," it say in a note.

Meanwhile, imports fell 3.6 percent on year in February, sharply below expectations for a 3.1 percent increase in a Reuters poll.

"[The] drop in import values was largely caused by another decline in petroleum import values, which reached the lowest since late 2010," Thieliant said. "Judging by the Bank of Japan's import price index, the plunge in the price of crude oil since last summer has now mostly been reflected in the cost of oil imports. However, import prices of natural gas, which tend to follow the price of crude oil with a lag of about six months, have just started to fall. The trade shortfall may therefore still narrow a touch further in the near-term."

Japan's trade deficit narrowed to 424.6 billion yen ($3.5 billion) in February from 1.179 trillion yen in January and compared with expectation for a deficit of 1.05 trillion yen.

-Reuters contributed to this report