A Japanese flag flies atop the Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Tuesday, March 17, 2015. Haruhiko Kuroda, governor of the Bank of Japan (BOJ), said he couldn't rule out the risk of consumer prices falling in Japan after the central bank on Tuesday maintained record monetary stimulus. Photographer: Yuriko Nakao/Bloomberg via Getty Images

JAKARTA (TheInsiderStories)Japan’s trade balance turned to a surplus of JPY 339 billion (US$ 3.0 million) in February on a non-seasonally adjusted basis, following four consecutive months of a deficit. On a seasonally adjusted basis, the balance also turned to a surplus of JPY 116 billion, after recording deficits for seven consecutive months.

The improvement reflected a faster decline in imports, down 6.7 persen y/y, than in exports down 1.2 persen y/y. The drop in both imports and exports was mainly due to the disruption caused by Lunar New Year holidays in Japan’s trade partners.

Average export volume in January and February dropped 4.7 persen y/y, suggesting slightly milder downward momentum after a contraction of 5.8 persen y/y in December. That said, the softer decline in exports was due partially to an 86.4 persen y/y surge in exports of ships, which is probably not sustainable, while exports of semiconductors and other electrical machinery remained sluggish.

The weakness in imports partially reflected weak oil prices and slack demand for mineral fuels due to warmer temperatures, although declines in a broad range of imports – from materials to electrical machinery – indicate weak production activities.

Japan’ exports are likely to remain weak over the near term. The export orders index of the Nikkei Japan Manufacturing Purchasing Manager’s Index remained below 50 for the third straight month in February, and machine tool orders from overseas also continued to drop in February. The Business Survey Index for the first quarter of 2019 shows that all industries expect external demand to gradually improve in the next two quarters.

Harumi Taguchi, principal economist at IHS Market notes, although Japan’ current-account surplus is likely to persist, the trade balance will unlikely show significant improvement over the near term, given that persistent global uncertainties and the repercussions from US-China trade tensions will probably weigh on exports and the current account surplus.

The yen’ recent appreciation and a softer global economy would mean weaker income from foreign currency assets, which could also weigh on the primary income over the near term. The December results indicate that net exports will likely make a negative contribution of 2 percentage points to the quarter-on-quarter growth in real GDP in the fourth quarter of 2018.

The Bank Of Japan (BoJ) last week cut its view on exports and output while keeping policy unchanged. Yet, extended weakness in exports could put it under pressure to deliver more easing, especially as inflation remains well off its 2 percent target and pressure on businesses and consumers continues to rise.

In the news conference following last week’s policy meeting, BoJ’ governor Haruhiko Kuroda acknowledged the challenges the economy faces but gave no indication there will be any additional stimulus.

But he may have to change tack in the face of a run of weak economic indicators. Many in the BoJ expect the economy to emerge from the current soft patch in the second half of this year, assuming China’s stimulus plans can revive demand there.

The biggest worry among BoJ policymakers is that weakening exports and output will hurt corporate sentiment, prompting firms to delay capital expenditure and wage hikes.

However, it is still unclear whether external demand will improve as industry anticipates, given prolonged uncertainties over the US-China trade talks, Brexit and other global uncertainties.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com