Japan's exports in May rose more than expected from a year earlier, in a sign that growth in Asia and other developing countries is continuing to offset falling U.S. demand -- at least for now.
But economists were cautious about the outlook, warning that the impact of the U.S. downturn will eventually spread to other parts of the world, thereby hurting Japan's already weakening corporate activity.
The data did little to alter the prevailing market view that the Bank of Japan will sit tight on interest rates until early next year or later.
"Exports did rise, but the growth is not that strong," said Takeshi Minami, chief economist at Norinchukin Research Institute.
Exports climbed 3.7 percent from a year earlier, beating a median forecast for a 1.9 percent rise and keeping pace with the 3.9 percent increase logged in April.
"The Bank of Japan is focusing mostly on downside economic risks from overseas developments, and the impact of the global economic slowdown is gradually appearing. It is basically impossible for the BOJ to raise rates at this point."
Derivatives markets are now pricing in about a 46 percent chance of a 25 basis point hike in Japan's benchmark interest rate, now at 0.5 percent, by the end of this year.
Financial markets did not react much to the data, with many traders bracing for the U.S. Federal Reserve's interest rate decision later in the day.
Exports to the United States fell 9.5 percent to mark the ninth straight month of decline as slowing growth there dented demand for Japanese automobiles, while exports to the European Union were down 1.1 percent.
"Exports to major industrialized economies are weak. The focus now is whether and when the weakness will spread to exports bound for developing economies," said Norinchukin's Minami.
The weak demand in developed nations was offset by an 8.1 percent rise in exports to Asia with shipments to China, now Japan's biggest customer, up 12.3 percent.
Some economists, however, say that trend may change.
"Emerging economies remain brisk but some of them have stopped subsidies for energy costs, and there are worries that domestic demand there may weaken and the economy may falter as inflation risks prompt central banks to tighten monetary policy," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute. "That is a risk."
Exports have been a key driver of the world's second-largest economy, which is in its longest post-war growth cycle.
But some economists have warned that exports were set to slow in coming months as the fallout from U.S. subprime woes hurts demand for goods in emerging economies.
Imports were up 4.4 percent in May from a year earlier, against an expected 8.4 percent rise, Ministry of Finance data showed.
The trade surplus in May fell a smaller-than-expected 7.6 percent from a year earlier to 365.6 billion yen ($3.39 billion), against a consensus forecast for a 40.0 billion yen surplus.
Japan's economy grew 1 percent in January-March thanks to solid exports, but economists expect it to contract slightly in the April-June quarter as exports would probably slow and spikes in crude oil eat into corporate profits.
Bank of Japan data showed that the corporate services price index, which tracks prices of business-to-business services, rose 0.6 percent in May from a year earlier.
The Bank of Japan has left monetary policy steady since February 2007, when it raised rates to 0.5 percent.
But it dropped its tightening bias in April to adopt a neutral stance on policy due to economic uncertainties at home and abroad.