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Japan suffered its worst annual trade deficit in March as exports growth slowed to its weakest in a year, suggesting a rapid loss of economic momentum that may prompt policy makers into early action as a national sales tax hike puts more strain on growth.
The Bank of Japan (BoJ) has repeatedly ruled out fresh easing measures in the near term, insisting that the economy is on track to meet its two per cent inflation target even as recent soft data hit investor confidence.
However, the double-whammy of weak external demand and a chill in domestic consumption from the April 1 sales tax hike to eight per cent from five per cent might add pressures on the BoJ to act sooner rather than later.
"If sluggish exports persist and domestic demand slumps more than expected in April and May, the Bank of Japan could ease policy further as early as in June or July," said Naoki Iizuka, economist at Citigroup Global Markets Japan
The slowdown in China, a major export market for Japan, is another blow for the world's third-biggest economy. Ministry of Finance data showed that exports rose 1.8 per cent in March from a year earlier, the slowest since March last year, following a 9.8 per cent annual gain in the previous month. That was well below a 6.3 per cent increase expected by economists in a Reuters poll.
Worryingly, shipments to China rose an annual 4.3 per cent in March, a marked slowdown from a 27.6 per cent annual increase in February. Moreover, US-bound shipments grew a modest 3.5 per cent, the slowest annual gain since December 2012 when they fell 0.8 per cent.
The weak external shipments helped push Japan's trade deficit to a record 13.75 trillion yen ($134.45 billion) for the financial year that ended in March, further undermining the balance of payment position.
Tax hike impact
In volume terms, shipments fell 2.5 per cent in March from a year earlier, underscoring the struggles of the export sector as a weaker yen has boosted import costs more than export income.
The huge increase in imports of fossil fuels to offset the shuttering of nuclear plants after the March 2011 earthquake and tsunami have helped to bump up the trade deficit. The ongoing shift in Japanese manufacturing plants to overseas centres have also tempered the benefits of a weaker yen on the export sector.
Policymakers are counting on exports - a key driver of the Japanese economy - to help cushion any slide in domestic demand after the sales tax rise.
The signs are not good, though. The latest data joins a recent string of soft economic reports including capital spending and private consumption, which have kept alive expectations for the BoJ to add to last April's intense burst of monetary stimulus.
"It's hard to expect export growth will offset the impact of the sales tax hike on domestic demand, and the economy is likely to stagnate in the summer," said Takeshi Minami, chief economist at Norinchukin Research Institute, echoing market expectations for additional BoJ stimulus in July when it reviews its twice-yearly economic outlook.
After speeding past many of its developed country peers in the first half of last year, Japan's economy has slowed in recent quarters as the effects of Tokyo's aggressive stimulus faded. Concerns of a deeper pullback have hit investor confidence and the stock market this year.
PATIENT BOJ
However, both the government and the BOJ have indicated their willingness to look past a temporary dip in growth, saying the economy is on track to escape years of deflation and tepid growth.
Policymakers and economists expect the economy to contract in the current quarter due to the sales tax rise, and see a return to moderate growth in the following quarters.
Japan's government cut its overall economic view for the first time since 2012 due to pullback in demand after the tax hike. But it saw no need for more stimulus, saying that the economy was on track for a moderate recovery. The central bank cut its view on exports in March, saying they were levelling off due in part to slack demand from Asia.
On Monday, Chief Cabinet Secretary Yoshihide Suga said that export will start picking up from now on as global economy recovers, echoing the view of the central bank.
The BOJ will hold its next policy review on April 30, when it will also issue new long-term economic and price forecasts in its twice-yearly outlook report.
The MOF data showed imports grew 18.1 percent in the year to March, boosted by elevated import costs of fuel due to a weak yen and the last-minute demand before the April 1 tax hike.
That compared with a 16.2 percent annual gain forecast by economists and followed a 9.0 percent rise in the previous month.
The country's trade balance stood at a deficit of 1.446 trillion yen in March, after a record trade gap of 2.79 trillion yen in January. That marked a record 21-month run of deficits.
