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Japan Exports Soft, Business Mood Dips

Exports to the United States have fallen and sentiment among Japanese manufacturers has hit a two-year low, clouding the outlook for Japan's export-reliant economy amid financial market mayhem that has prompted talk of a cut in interest rates.

Growth in sales to China -- now Japan's No. 1 export customer -- and Europe also slowed in December from a year earlier, data on Thursday showed, shrinking the Japanese trade surplus by 20.9 percent and showing the spreading effect of a U.S. slowdown.

"Shipments to the United States will likely continue to be sluggish and those to EU could fall as there are some signs that the slowdown in the U.S. economy is rippling out to Europe," said Takeshi Minami, chief economist at Norinchukin Research Institute. "Exports to Asia remain firm, but if the U.S. economy slows further, the impact on the region will be inevitable."

With markets gyrating and the Japan's Nikkei stock average having fallen nearly 30 percent in the past six months, a group of ruling party lawmakers met on Thursday to push for measures to stimulate the market.

Tepid consumer spending, despite interest rates already at a very low 0.5 percent, means Japan has been relying heavily on investment and exports by major manufacturers to maintain growth.

But those manufacturers are becoming increasingly gloomy, the monthly Reuters Tankan survey of manufacturer sentiment survey showed, as they face rising raw materials, slack demand and economic fall-out from the U.S. subprime crisis.

China No. 1

In December, U.S.-bound exports fell 4.5 percent from a year earlier, marking the fourth straight month of annual decline.

Brisk sales of computer chips and other electronic devices helped China, including Hong Kong, overtake the United States as Japan's biggest export market last year.

That growth could soften the blow of a U.S. slowdown, were it not for the fact that many of the goods shipped to China are used in products later exported to the United States.

The December figures showed growth in China-bound exports slowed to 8.4 percent from double-digit annual rises seen since last March.

Similarly, shipments to the European Union in December slowed sharply to a 2.4 increase from a year earlier -- tumbling from 23.7 percent annual growth seen as recently as October.

"We had expected exports to the United States to slow but it seems shipments to other regions are slowing as well, which is not a very good sign," said Junko Sakuyama, economist at Dai-ichi Life Research Institute.

"The recent sharp stock price falls may hurt consumer sentiment in emerging nations, which could affect Japanese exports toward the middle of this year."

Tax Breaks And Rate Cut?

The data met a muted reaction from volatile markets, as investors juggled ongoing fears the subprime crisis will lead to a U.S. recession with bouts of relief from measures to combat the slowdown, such as this week's big U.S. interest rate cut.

Worried about the impact of the subprime crisis on Japan, a group of the ruling Liberal Democratic Party lawmakers called on the government to introduce tax exemptions on dividend income and capital gains, a draft of proposals being debated showed.

The draft also included a call for the BOJ to cut interest rates back to zero and return to quantitative easing, a policy of force-feeding banks with cash.

Japan's Nikkei 225 Average, which has fallen 15 percent so far this year, rose 1.9 percent on Thursday thanks to a rebound on the Wall Street and the tax break proposals.

The U.S. recession fears and weak housing investment at home due to tighter building rules have wiped out expectations for a rate hike in Japan this year, and markets are now pricing in a possible rate cut instead.

The Bank of Japan has been working to restore Japan's low rates to more normal levels, but a Reuters poll of analysts and traders showed about a third of them expect the BOJ's next move to be a rate cut.

Swap contracts on the overnight call rate were showing about a 20 percent chance of a rate cut at the BOJ's next meeting in February and a 50-60 percent chance of one in June.