Japan May Trade Deficit Much Bigger Than Expected

TOKYO (Dow Jones)--Japan posted a much bigger-than-expected merchandise trade deficit in May, as it imports more fossil fuels to offset a shutdown of its nuclear power plants and the impact of the European debt crisis weighs on its economic recovery.

Japan's trade deficit stood at 907.26 billion yen in the month, data released Wednesday by the Ministry of Finance showed, swelling 5.4% from a year earlier and much larger than the Y520.0 billion gap expected by economists polled by Dow Jones Newswires and the Nikkei.

The deficit was the biggest on record for the month of May, a ministry official briefing reporters said.

The trade figure, which was in deficit for the third straight month, has been closely watched for its possible impact on overall currency flows as Japan's exports recover only modestly and the nation buys more imported energy to make up for its offline nuclear power plants over the past year.

The yen came under downward pressure after the data, with the dollar rising to Y79.07 from Y79.02 before the release.

Japan's trade balance "is likely to remain in a deficit at least for the rest of this fiscal year," through March as "imports will probably keep rising due to energy-related items, while any improvement in exports should remain subdued due to not-so-robust Asian and European economies," said Mizuho Research and Consulting senior economist Norio Miyagawa.

"Exports, however, are likely to show a modest recovery ahead thanks to strengthening demand from the U.S.," he added.

Exports in May were up for the third straight month, rising 10.0% from a year earlier to Y5.235 trillion on foreign demand for products such as automobiles and auto parts, the finance ministry said. That was better than economists' forecasts for an 8.9% increase and higher than the previous month's 7.9% gain.

Some economists caution against too much optimism on export growth, saying that the figures benefit from a low base of comparison with the year-earlier month when the earthquake and tsunami hit domestic production and severely crimped the country's export capacity--especially in the auto sector.

Exports to the U.S. rose sharply, up 38.2% on strong demand for Japanese cars. Auto exports to the U.S. were up 128.5%.

Exports to China were up 3.0% from a year earlier, the first rise in eight months, but exports to the European Union were down 0.9%.

The ministry official said that Japan posted a trade deficit with the EU in May, its the first ever shortfall with the regional bloc since records began in 1979.

Imports climbed 9.3% to Y6.142 trillion on buying of foreign oil and gas, higher than economists' expectations for 2.7% growth. In April, imports expanded 8.1%.

Japan's government has recently ordered a pair of nuclear reactors back online for the first time since the disaster. But analysts say Japanese gas imports may stay at high levels unless many more plants are restarted.