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JAKARTA (TheInsiderStories)Japan’s trade balance turned out a deficit of JPY578 billion (US$ 5.2 billion) in May on a non-seasonally adjusted basis, a deficit 1.8 times larger than a year ago.

On a seasonally-adjusted basis, the trade balance showed a deficit of JPY296 billion, which follows two consecutive months of surplus, largely due to a 10.6 percent month-on-month (MoM) surge in imports.

Exports rose by 8.1 percent year-on-year (YoY), thanks largely to increased exports of motor vehicles and parts, semiconductor machinery, other ordinary-classed items, and electrical machinery.

While exports to China remained solid (up 13.9 percent on annually basis), to the United States (U.S) continued to grow (up 5.8 percent from last year), to the European Union softened to 0.7 percent (or declined by 6.4 percent a year ago in volume terms) largely due to a decline in exports of shipping vessels.

At the same time, imports increased by 14.0 percent from the same period of last year, largely because of increased imports of mineral fuels, medical products and nonferrous ores, and a 264.4 percent surge of imports of aircraft.

Harumi Taguchi, Principal Economist, IHS Markit expects Japan’s trade balance to remain in surplus over the near term as the weakness in May was partially due to one-off factors (such as exports of ships and imports of aircraft).

That said, high oil prices are likely to be an ongoing factor that will determine imports that will weigh on the trade surplus; at the same time, yen weakening will support increases for both exports and import unit prices.

In addition, increased global trade tensions, particularly trade friction between the U.S and China, are of great concern as prolonged uncertainties and additional tariffs the two economies could impose on each other could lower demand not only from the U.S and China, but also from other Asian countries.

This month, Prime Minister Sinzo Abe‘s country real gross domestic (GDP) growth’s stayed close to the first preliminary figures, which confirms a contraction of 0.2 percent quarter-to-quarter (QoQ), or a 0.6 percent in annualized basis in the first quarter (Q1) of 2018, according to government data published on June 8.

Last May, the Japan’s GDP contracted at an annualized rate of 0.6 per cent in the Q1 of 2018. The world’s third-largest economy shrank at an annualized pace of 0.6 percent in the January-March period, compared with revised 0.6 percent growth in the final quarter of 2017.

That snaps a run of eight quarters of consecutive growth, the longest Japan has achieved since the boom days of the late 1980s.

The data showed, the revision for capital expenditure led to a sixth consecutive quarter of increase, the weakness reflected the first decline in six quarters for investments in other machinery and equipment. While, corporate financial statements in Q1 suggest the weakness reflected a decline in investment by manufacturers, particularly for small and medium enterprises, in tandem with declines for ordinary profits with higher costs.

The downward revision to consumer spending reflected weaker spending for durable goods. The downward revision for inventory was due largely to de-stocking for raw materials and supplies.

The new data are a setback for Abe, who has used the run of growth as evidence of the success of his economic platform, known as Abenomics. Abe, who faces a party leadership election in September, has also been under pressure from opposition lawmakers’ allegations that he did favors for friends, charges he denies.

Still, government officials and analysts expect the decline to be temporary. Some analysts expect the economy to rebound as soon as this current April-June quarter.

In the 17th meeting of the Council on Investments for the Future at his Office on June 6, Abe reported the investments have grown by more than 1 quadrillion yen compared to 2012. Flows of global funds are changing significantly, including an increase in green bond issuance by 50 times, he said.

Abe stated, in the coming few years will be a critical moment for the country. He declared this year to be the first year of the fourth industrial revolution and will utilize technologies in every field to materialize the productivity revolution.

Commenting on the Japan’s GDP performance, Taguchi said, the revised numbers are in line with IHS Markit expectations, the weakness in domestic demand is a concern.

IHS Markit expects real GDP growth to turn to positive in Q2, but the recovery could be milder than we previously anticipated. We revised down our annual growth forecast to 1.1 percent in 2018, he said.

He expect the uptrend for capital expenditure to continue thanks to solid the investment plans and machinery orders by manufacturers, as well as sustained demand for machinery and equipment to counter labor shortages.

That said, geopolitical risks and trade friction between the U.S and other countries could weigh on Japan’s external demand, which could hinder the capital expenditure.

In addition, Taguchi stressed it, the recent weakness in household spending suggests a slack recovery in consumer spending after a contraction in Q1. Although slightly stronger wage increases and softer fresh food prices are likely to help a recovery, inflationary expectations could remain consumer sentiment weak and keep households cautious about spending.

Although private capital expenditure was revised up to 0.3 percent q/q from a 0.1 percent drop, as IHS Markit expected, this was offset by marginal downward revisions to consumer spending and inventory changes.

Meanwhile, the International Monetary Fund (IMF) said that it expects the Japanese economy to grow 1.2 percent in 2018, maintaining the projection it made in January.

In its latest World Economic Outlook report the IMF also kept intact its 2019 growth forecast for Japan, at 0.9 percent, citing favorable external demand and rising private investment as contributing factors.

The country faces a rapidly aging population and a lack of women in the workforce, while inflation has remained stubbornly low. Moderate inflation is good for an economy as it encourages consumers to spend.

Email: linda.silaen@theinsiderstories.com