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Bad trade data casts a cloud over Japan

Japan's exports and imports tumbled in May, data on Wednesday showed, raising concern about the outlook for the world's third biggest economy as it weathers a rise in the country's consumption tax.

May exports fell 2.7 percent from a year earlier, the first annual decline in 15 months. That compared with a 5.1 percent jump in May and was much worse than analyst expectations in a Reuters poll for a 1.2 percent decline.

Imports fell 3.6 percent on-year, compared with expectations for a 1.7 percent rise, bringing the trade balance to a deficit of 909 billion yen ($8.9 billion) in May.

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"In today's world of very low-dollar value export growth, Abenomics could only count on export-led growth by taking market share. The easiest way to take market share is by depreciating the currency, which hasn't been happening in Japan since the May 2013 taper tantrum," said Tim Condon, the head of research of Asia at ING Financial Markets.

"It remains to be seen whether Abenomics can stimulate domestic spending sufficiently to offset weak export demand as only China and Singapore have managed to do this year," he added.

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Abenomics is the term many analysts and commenters use to describe the economic policies of Japan's Prime Minister Shinzo Abe, who came to power in late 2012 with a pledge to revive the country's growth prospects.

Part of that policy has been massive monetary stimulus to help weaken the yen and end deflation. Although the yen weakened about 22 percent against the dollar in 2013, its impact on exports has faded while the currency has strengthened almost 3 percent this year.

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The breakdown of the trade data showed that exports to Asia and the U.S. fell in May.

"We see some sluggishness in exports to Asian countries such as China but exports to Europe picked up so that shows Japan is likely to be supported by the developed economies in the months ahead," said Junko Nishioka, chief economist at RBS in Tokyo.

Cargo containers are placed at a container wharf in the port of Tokyo.
Toshifumi Kitamura | AFP | Getty Images
Cargo containers are placed at a container wharf in the port of Tokyo.

Japan raised its consumption tax in April for the first time in 17 years, with the tax rising to 8 percent from 5 percent. While consumers ramped up their spending ahead of the tax hike a slowdown in consumption after that is now weighing on economic activity, economists say.

Japan's markets showed little immediate reaction to the trade data. The benchmark Nikkei stock index rose 0.3 percent in early trade while the yen was little changed around 102.2 per dollar.

Read MoreBank of Japan keeps monetary policy unchanged

"There has been a post-tax-hike slump but overall I think the economy is taking the tax increase well," said JPMorgan Funds Chief Asia Pacific Strategist Tai Hui.

"We've been optimistic on Japan [stocks] since the end of 2012. And the key here is not so much the weak yen supporting exporters but we think Abenomics will help revive the economy," he told CNBC Asia's "Squawk Box."

Contact Asia Economy

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