Can Trade Data End Bad Press for Abenomics?

Shubiya district, Tokyo, Japan
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Shubiya district, Tokyo, Japan

Japan's economic outlook could get a boost on Wednesday, with data expected to show a rise in exports and a pick-up in domestic consumption that could offer Japan's radical economic policies a respite after the bad press they have received recently amid a heavy sell-off in stocks.

Economists told CNBC that they expected Japan's trade deficit to widen in May, adding that they forecast a surge in imports to reflect a marked improvement for the world's third largest economy.

"Imports will be very strong," said Masayuki Kichikawa, chief Japan economist at Merrill Lynch Japan Securities. "This is in part due to higher energy imports, but we are also seeing a strong recovery in the imports of many products, due to relatively strong domestic demand."

Kichikawa forecast the trade deficit for May to widen to 1.37 trillion yen ($14.4 billion), from about 879.9 billion yen in April. He forecast an 11 percent year-on-year rise in imports, up from a 9.5 percent rise in April, and a 4 percent increase in exports compared with a 3.8 percent rise the previous month.

Last month, weaker than expected trade data raised concerns that a weaker yen was failing to boost Japan's export-focused economy as much as hoped.

But Kichikawa said a surge in imports would be a key sign that Japanese Prime Minister Shinzo Abe's radical economic policies, coined "Abenomics," are working.

"To some extent this is a sign that Abenomics is stimulating domestic demand. It is a result of both higher government spending, and the stimulation of consumption due to higher equity prices, together with a cheaper yen, which has led to an increase in bonus payments," he added.

Abe, who became Japan's Prime Minister after elections in December, has pledged to revive the stagnant economy and end 20 years of deflation. His policies are based on "three arrows," monetary and fiscal stimulus to get growth going and long-term structural change to ensure sustainable growth.

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Although Abe's policies have created a buzz around Japanese markets, boosting stocks to five-and-a-half year highs in mid-May and weakening the yen by roughly 15 percent since last December, in recent weeks the policies have received some bad press.

Abe unveiled his long-term growth plan or "third arrow" earlier this month and investors reacted with disappointment that the measures were not as bold as hoped for. An 18 percent fall in the Nikkei from its May peak and an 8 percent rally in the yen against the dollar reflect some caution about Abenomics.

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Wednesday's trade data could boost sentiment in Japanese markets.

"Imports are being lifted by the rise of commodity imports in yen terms and by solid domestic demand," said analysts at Moody's Analytics in note.

Merrill Lynch's Kichikawa said the outlook for Japanese exports was improving thanks to a weaker yen, although the impact of currency weakness would take time to show up in the data.

"There is always a time lag between a change in the foreign exchange rate and the improvement in export volumes, it normally takes at least a year," he said. "This year we will continue to see a wide trade deficit for Japan, but next year it will come down," he added.

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By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie