Weak yen not enough for Japan exporters as China slows
Weaker-than-expected Japanese export numbers on Wednesday suggest that even a strong boost from a weak yen may not be enough to protect exporters from slowing demand in China, analysts say.
Japanese exports rose 7.4 percent in June from a year earlier, below market expectations for a 10.3 percent rise and down from a 10.1 percent annual jump in May.
Exports to China, one of Japan's biggest trading partners, rose 4.8 percent year-on-year in June compared with an 8.3 percent rise in May.
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"The export data was not overly bad, but exports to China were relatively weak when you consider the steep decline in the yen should be boosting exports," said Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch.
There are growing signs of weakness in China's economy, which slowed for a second straight quarter in the second quarter of this year. An HSBC survey of China's manufacture sector released on Wednesday for instance showed manufacturing activity shrank for a third straight month in July.
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"At the moment, the slowdown of the Chinese economy is a downside risk for Japanese exports and it is worth noting," said Long Hanhua Wang, Japan economist at the Royal Bank of Scotland.
Slowing demand from China is likely to be a concern for Japan's government, which has pledged to revive the economy. A key part of its plan is a weak yen, which gives the country's exporters an edge in overseas markets.
The yen has weakened about 15 percent against the dollar this year on the back of aggressive monetary stimulus by Japan's central bank.
"So far companies are still gaining from valuation changes because of the weaker yen, but volumes are only recovering slowly because of slow growth in Asia and zero growth in Europe," said Martin Schulz, senior economist at the Fujitsu Research Institute.
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A weak yen has also raised the cost of imports and June imports rose by 11.8 percent from a year earlier, below analyst expectations in a Reuters poll for a 13.6 percent annual rise.
Japan's trade balance was in deficit for a twelfth consecutive month. The deficit was 180.8 billion yen ($1.8 billion) in June, greater than expectations for a 160.6 billion yen deficit.
Analysts said there were some reasons to be positive about the outlook for Japanese exports in the months ahead.
"China's economy saw some slowdown in the first two quarters of this year and it takes some time for that to impact trade volumes, so the impact [on Japan exports] could continue throughout the summer," said Kichikawa at Bank of America Merrill Lynch.
"However, we think a further slowdown in the Chinese economy is unlikely and China will take some steps to sustain 7.5 percent growth levels," he added, referring to Beijing's full-year growth target.
Analysts added that a recovery in the U.S., the world's biggest economy, should bolster Japanese exports in the months ahead.
Japan's exports to the U.S. remained robust at 14.6 percent in June on a year earlier, slightly lower than a 16.3 percent increase in May.
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"What's happening in China is a cause for concern and that is clearly going to weigh on Japan export numbers, but at the same time there is a silver lining," said Vasu Menon, vice president of wealth management at OCBC bank.
"The latest data show exports to U.S. is quite strong, and if you are confident the U.S. will get some further steam and perhaps Europe is at some turning point later down in the year, all that will translate into some sort of offsetting factor," he added.
—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie