Japan's rising surplus may ignite trade friction

Japan's rising surplus may ignite trade friction

TOKYO (Reuter): Japan's trade surplus surged in June, showing
the country's tentative economic recovery still heavily reliant
on exports, which economists said was bound to worsen trade
friction with the United States.

The Finance Ministry said yesterday that Japan's current
account surplus -- the broadest measure of trade in goods and
services -- jumped nearly 56 percent from a year earlier to 1.02
trillion yen in June, the third monthly rise in a row.

The surplus in merchandise trade alone rose almost 19 percent
from the same month a year earlier to 1.1 trillion yen.

At Friday's rate of around 119 yen to the dollar, the current
account surplus in June stood at US$8.5 billion and the
merchandise trade surplus was $9.2 billion.

Although the figures, which came in at the top end of
expectations, failed to jolt financial markets, economists said
they were not good news for Tokyo policy-makers facing U.S.
charges that Japan is trying to export its way out of its long-
running economic slump.

"We think it's inevitable that trade friction will increase,"
said Richard Jerram, chief economist at ING Barings Securities in
Tokyo.

"The main reason for this is that Japanese manufacturers are
facing very weak demand at home so they've been forced to look to
overseas markets to sell their goods," he told Reuters Financial
Television.

Domestic demand, notably private consumption, has been hit by
a rise in the national sales tax on April 1.

Jerram said Japan's car industry was a prominent example,
increasing exports to make up for the drop in domestic demand.

"They're exporting frantically and provoking quite a reaction
from the United States. And I think this is just going to get
worse in the coming months," he said.

Ministry data showed that Japan's car exports rose almost 40
percent in June from a year earlier.

Earlier this week, U.S. Trade Representative Charlene
Barshefsky said U.S. officials were concerned that U.S. car
exports to Japan had decreased and that the trade deficit with
Japan in general was deteriorating.

Japanese officials appeared to try to play down the trade
data, saying recent rises in the surplus were due to the increase
in the sales tax and that they saw no signs of continuing large
rises.

But economists said the surplus would follow a rising path for
some time due to the recent weakening of the yen, and some said
Japanese officials may have no choice but to turn a blind eye,
given the feebleness of the economic recovery.

"There are some views that Japanese authorities will allow the
yen to weaken further in order to support exporters and prop up
Tokyo share prices," said Mineko Sasaki-Smith, chief economist
with Credit Suisse First Boston Securities in Tokyo.

Worsening pessimism over the economic outlook has dampened
sentiment in the Tokyo stock market and the Nikkei average of 225
leading shares has been treading water below the key 20,000 mark
in recent sessions.

But Sasaki-Smith said such a policy on the yen would backfire
as it would fuel U.S. pressure and risk inviting inflation
through a rise in import prices.

"(The U.S.) would not stir up trade issues on the surface, but
below they would step up pressure," she said, adding: "And if the
yen were to weaken further, that would push up import prices and
ultimately tie the hands of the Bank of Japan."

She said it could lead to a worst-case scenario in which the
central bank was forced to raise interest rates to tackle
inflation, only to see the economy get bruised by higher rates.