'Cracks in Japan model'

JAPAN'S trade deficit widened to a record last month as energy imports jumped, highlighting a risk of trying to revive the country's export engine through policies that could weaken the currency without also pursuing broader economic reforms.

A central bank board member said the yen's fall was helping exports - they posted their first annual rise in January in eight months - and said the Bank of Japan (BoJ) will push on with its policy, but analysts expect trade deficits to persist for some time yet.

Prime Minister Shinzo Abe has staked his political career on lifting Japan out decades of malaise through aggressive fiscal and monetary policy, but the data indicated a rise in exports on its own was not enough to turn things around.

"Trade deficits could continue for much of this year, if not into next year," said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting.

"This shows that on a net basis money is leaving the country. We need to turn this around by increasing our earnings power from exports. A weak yen will help, but it won't solve all our problems."

Since November, the yen has tumbled 16 per cent versus the US dollar to its lowest in nearly three years as expectations have grown about Abe's promises of radical policy to spark an economy that has contracted for three successive quarters.

Economists polled by Reuters have raised their economic growth forecast for the 2013/14 fiscal year to 2.1 per cent, expecting the economy to benefit as exports recover due to the weaker yen and improving global demand.

The trade deficit reached a record 1.6 trillion yen (RM52.95 billion) in January, larger than a median forecast for a 1.38 trillion yen deficit, Finance Ministry data showed.

Imports jumped 7.3 per cent in January from a year earlier, well above the median estimate for a 1.6 per cent annual increase and the biggest rise since May last year.

Japan has been importing more fossil fuels to make up for the closure of almost all of its nuclear power plants after the Fukushima nuclear disaster almost two years ago, and the weaker yen is increasing the cost of those shipments.

"A lot of people are pinning their hopes on a weak yen, but exports won't recover until the spring at the earliest," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. "We cannot reject the argument that a weak yen will eventually benefit Japan, but it will take more time."

Japan's exports rose 6.4 percent in January from a year earlier, more than the median estimate for a 5.6 per cent annual increase. Exports to China, a major destination for Japanese shipments, rose three percent from a year earlier.

"Recent exchange-rate moves will likely underpin exports and corporate revenues," BoJ board member Yoshihisa Morimoto told business leaders in Kochi, western Japan.

"The BoJ will continue to promote powerful monetary easing through steps, including massive government bond purchases."

In January, the BoJ doubled its inflation target to two per cent despite some board members doubting the value of the move. Reuters