Japan surplus jumps despite slower exports to U.S.

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TOKYO, Nov 21 (Reuters) Japan's exports hit a record high in October and the trade surplus jumped by two-thirds from a year earlier but shipments to the United States fell, raising concerns that a slowing US economy will hurt Japan's export-led growth.

Firm shipments to Europe, China and other parts of Asia offset a decline in exports to the United States, figures issued on Wednesday showed, pushing overall exports up 13.9 percent from a year earlier and underscoring a view that exports remain solid.

Financial markets showed little reaction to the trade data but the yen rose to a two-year high as worries about the U.S.

economic outlook and expectations for further U.S. monetary easing pushed down the dollar. Japanese share prices hit a 16-month closing low, hurt in part by a firmer yen. T] ''Exports to the United States fell, but not to such an extent that showed subprime problems were taking a severe toll on Japanese exports,'' said Takeshi Minami, chief economist at Norinchukin Research Institute.

''But it's worrying that a slowdown in exports of cars and construction machinery is becoming noticeable.'' Exports to the United States fell 1.5 percent from a year earlier, hurt by declines in shipments of cars and construction machinery, as the world's largest economy digests problems in the subprime mortgage sector and resulting market turbulence.

It followed a 9.3 percent annual drop in September, the biggest decline since November 2003. It is the first time exports to the United States have fallen for two months in a row since April-May 2004.

But shipments to China climbed 19.2 percent from a year earlier and those to Asia rose 12.9 percent. Shipments to the EU jumped 23.7 percent, supporting overall export growth.

CHINA TO OVERTAKE U.S.

China is seen overtaking the United States as Japan's biggest export market this year for the first time in modern history as the booming Chinese economy attracts Japanese products ranging from machinery to steel.

China is already Japan's largest trading partner.

Even so, the U.S. outlook remains crucial to Japan's economy as a large proportion of Japanese exports to China consist of parts for assembly into final products that are then shipped to the United States.

''There are worrying signs of a slowdown in U.S. personal consumption,'' said Junko Sakuyama, an economist at Dai-Ichi Life Research Institute.

''If the U.S. economic slowdown is prolonged, strong demand in Asia and emerging nations may not be enough to keep exports strong. While its presence may have diminished somewhat, the United States undoubtedly remains a huge consumer of goods.'' The Ministry of Finance figures showed Japan's trade surplus rose 66.1 percent in October from a year earlier to 1.0186 trillion yen (.27 billion), below analysts' median forecast for a 71.5 percent rise to 1.0522 trillion yen.

Overall exports increased 13.9 percent from a year earlier to a record 7.5155 trillion yen despite a stronger yen, above a market median forecast for a 12.4 percent rise. Imports rose 8.6 percent, boosted by crude oil import costs.

Resilient exports helped push up Japan's economic growth to a firm 0.6 percent in the July-September quarter from the preceding three months, or an annualised 2.6 percent.

But economists expect Japan's economy to grow at a slower pace in October-December as support from exports is seen easing on a further U.S. slowdown and higher oil prices.

The clouded outlook for the U.S. economy and global markets has pushed back expectations for a rate hike by the Bank of Japan from the current 0.5 percent.

''I expect Japanese exports to slow down more than the BOJ thinks in the coming months, as I doubt exports to Europe will continue to grow so strongly,'' Minami said. ''Given such risks ahead, I still think the BOJ cannot raise rates at least until July-September next year.'' Swap contracts on the overnight call rate do not fully price in a BOJ rate hike to 0.75 percent until the end of next year.

The BOJ's policy board meets next on Dec. 19-20.

REUTERS PDT VC1235

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