Annual export growth slowed to its weakest pace in more than a year in January as shipments to China lost steam before the Lunar New Year, but economists said the central bank's forecast for an export-led recovery remained intact as underlying demand overseas was still strong.
"Exports were weaker than expected but the overall trade data does not alter the scenario that the economy is emerging from a lull in the January-March quarter," said Yoshimasa Maruyama, economist at Itochu Corporation in Tokyo.
Yamaguchi, a career central banker and a close aide to Governor Masaaki Shirakawa, said Japan was making progress toward an end to deflation with annual rises in consumer prices seen accelerating toward the year starting in April 2012.
Still, the government and the central bank are unlikely to draw much comfort as turmoil in Libya and a recent spike in commodity prices cloud the outlook. Yamaguchi also warned against excessive optimism over the U.S. economy.
"Exports are resuming an uptrend," Yamaguchi said in a speech to business executives in Aomori, northern Japan, on Wednesday. "I expect Japan's economy to soon emerge from a lull and resume a moderate recovery path on strong overseas growth."
UNCHANGED ASSESSMENT
His comments are in line with the BOJ's assessment last week that Japan's economy was gradually emerging from a slowdown and heading toward a moderate recovery.
Yamaguchi warned that there was a chance that financial markets' optimistic view on the U.S. economy may be reversed given the huge balance sheet adjustment it needs to go through.
His comments "suggest optimism about the economy from a short-term viewpoint but he rather stressed downside risks for the medium-term, especially about the U.S. economy," said Seiji Shiraishi, chief economist at HSBC Securities Japan.
"The BOJ is examining how such risks will develop. While the economic cycle is recovering, if downside risks materialize, there is a possibility the BOJ will expand its easing steps," Shiraishi said.
The central bank is closely monitoring oil prices, which have soared due to spreading unrest in the Middle East and North Africa, but it sees no reason yet to alter its forecasts, Yamaguchi later told reporters.
Should this trend continue, it could stymie monetary policy because it could both harm growth and possibly hasten an exit from deflation.
STANDING PAT
"Commodity-driven inflation exacerbates terms of trade and weighs on economy, but if commodity price hikes don't accelerate that would keep core consumer prices from approaching levels that the BOJ sees as desirable," said Azusa Kato, economist at BNP Paribas in Tokyo.
"The BOJ will stand pat on monetary policy for foreseeable future, regardless of commodity prices."
Japan's exports in January rose 1.4 percent from a year earlier, the lowest growth since November 2009 and much slower than the median forecast for a 7.4 percent annual increase, Finance Ministry data showed.
Shipments to China, Japan's largest trading partner, increased 1.0 percent from a year earlier, a small fraction of the 20.1 percent annual increase in the previous month and also the smallest increase since October 2009.
The slowdown was mainly due to the Lunar New Year holidays in the first week of February, which are observed in China and some other Asian countries including South Korea, a ministry official said.
In comparison, South Korea's exports to China rose 15.4 percent in January. While the number, reported earlier this month, was far stronger than Japan's, it was also the lowest growth since October 2009 and well below the more than 40 percent overall growth.
"I think this is a temporary phenomenon," said Yoshikiyo Shimamine, chief economist at Dai-Ichi Life Research Institute in Tokyo.
"Exports of microchips and other electronics devices to Asia slowed substantially, but the inventory situation is improving. U.S. consumer sentiment seems to be picking up as well."
The trade balance showed a deficit of 471.4 billion yen ($5.67 billion), its first deficit in 22 months. That compared with the median forecast for a 60.0 billion yen surplus.
The purchasing managers index for January lends some support to optimism over exports, showing new export orders grew for the first time in four months.
The BOJ last week raised its assessment of the economy, signaling that no imminent monetary easing is on the horizon.
Still, the central bank is set to maintain its ultra-easy policy and keep interest rates in a range of zero to 0.1 percent unless a rise in consumer prices of around 1 percent seems likely.
The BOJ last year cut interest rates effectively to zero and set up a fund to buy assets ranging from government bonds to private debt, aiming to help the economy and end deflation.
(Writing by Stanley White; Editing by Alex Richardson and Richard Borsuk)
Source: Reuters By Leika Kihara and Tetsushi Kajimoto
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