Containers at a shipping terminal in Tokyo. Shipments to China, Japan's largest market, fell by 20 percent year-on-year. Exports to the European Union slid 7.7 percent, while shipments to the United States advanced 0.6 percent. Haruyoshi Yamaguchi / Bloomberg

Surge in energy imports sends trade deficit soaring to record high

Japan posted a record trade deficit in January as the yen's strength and weaker global demand eroded manufacturers' profits and slowed the nation's recovery from last year's earthquake and tsunami.

The gap widened to 1.48 trillion yen ($19 billion) and shipments dropped 9.3 percent year-on-year as energy imports surged, the Ministry of Finance reported in Tokyo on Monday.

The drag from trade risks countering the boost from reconstruction work that JPMorgan Securities forecast will drive a return to growth this quarter after the economy shrank in the final three months of last year.

The government is seeing progress in its campaign to rein in the yen, with the currency trading at the weakest in seven months against the dollar after the Bank of Japan last week announced extra monetary stimulus.

"The recovery pace may be slow," said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc in Tokyo. "That's because a recovery in exports may be dull and reconstruction demand may not come out as strongly as some people expect."

The yen traded at 79.48 to the dollar as of 12:12 pm in Tokyo, from 79.83 before the report. Japan sold a record 8.07 trillion yen on Oct 31 after the currency reached a postwar high of 75.35 against the dollar. The Nikkei 225 Stock Average climbed 1.4 percent.

Asian stocks also advanced after China cut banks' reserve requirements to fuel lending and buoy economic growth, boosting demand for riskier assets. The MSCI Asia Pacific Index rose 1.1 percent to 128.31 as of 11:57 am in Tokyo.

Japan's trade figures may have been skewed by the Spring Festival holiday falling in January instead of February this year, reducing business days in Asian markets.

Sony Corp, which gets 21 percent of its revenue from Europe, widened its loss forecast to 220 billion yen on Feb 2.

Besides the yen, it also cited cuts to production because of the flooding in Thailand and the cost of exiting a venture with Samsung Electronics Co for what will be its fourth annual loss in a row.

China, EU

Shipments to China, Japan's largest market, fell by 20 percent year-on-year, the biggest decline since August 2009. Exports to the European Union slid 7.7 percent while shipments to the United States advanced 0.6 percent.

Japan's GDP contracted an annualized 2.3 percent last quarter. Net exports, or overseas shipments less imports, subtracted 2.6 percentage points from this figure, the government said in a report last week.

In other parts of the world, France may say an index of business confidence was little-changed in February compared with January, when it fell to the lowest in almost two years, according to a Bloomberg survey of economists.

A separate index on the outlook for production probably stayed negative for a seventh month, economists predict.

Italy's industrial orders rose 0.4 percent in December from November, economists surveyed by Bloomberg said ahead of a report from the Italian statistics institute.

Current account

In Japan, the trade deficit of 2.49 trillion yen in 2011 was the second-largest since World War II. That also contributed to the nation's current-account surplus sliding to a 15-year low in 2011.

March's earthquake and tsunami led to the idling of nuclear plants and a surge in energy imports that contributed to the deficit.

Japan's liquefied natural gas imports rose 12.2 percent to a record in 2011 as power utilities increased thermal power generation by 12.6 percent year-on-year between April and September. Energy needs accounted for most of the gain in imports in January.

"The deficit is still expanding against a background of increasing energy imports," said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co in Tokyo and a former BOJ official. "Unless we see a significant increase in the operating rate of nuclear power plants, eventually the rising cost of power will be passed on to corporations. This is likely to accelerate the pace of shifting production abroad."

Temporary factors

BOJ Governor Masaaki Shirakawa said last month the trade deficit "won't become a firmly established trend" because it is driven by "temporary factors".

Shirakawa's board on Feb 14 expanded an asset-purchase program to 65 trillion yen from 55 trillion yen and set a price stability goal of 1 percent inflation.

"Clearly Japanese manufacturers are struggling," Hiroshi Shiraishi, an economist at BNP Paribas SA in Tokyo, said before the report. "We aren't really expecting a major pick-up in external demand because the US and Europe are undergoing balance sheet adjustments."

The eurozone's economy contracted in the fourth quarter for the first time in two-and-a-half years. Europe's woes were again highlighted on Feb 13 when Moody's Investors Service cut the ratings of six European countries including Italy, Spain and Portugal.

Japan's exports to the EU, its third-largest export market, fell 39 percent from 2007 to last year, according to Ministry of Finance figures.