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.