Japan's economy appears to be weakening in the April-June quarter as business conditions deteriorate and exports flatten off, suggesting that the recovery may have lost momentum.
In May, Japan's merchandise trade deficit rose more than what had been expected. According to the Financial Ministry data released earlier this week, the trade deficit increased to 907 billion yen ($11.5 billion) in May from 522 billion yen in April.
Economists expect that the trade deficit will increase further with energy imports continuing to grow as the country remains reliant on imported fossil fuels. Meanwhile, exports are likely to struggle as the global economy remains weak and the yen stays strong.
Continued growth in imports, in particular of fossil fuels, will be the main factor driving the trade deficit higher. The shutdown of the country's nuclear power plants has left Japan reliant on imported natural gas for energy. The scheduled restart of two of Japan's 54 reactors in July will do little to mitigate power shortages, leaving the country with around 20 percent less electricity generating capacity than last year, David Rea, an economist at Capital Economics, said.
The continuing crisis in Europe, the weakness in the U.S. market and the strengthening of the Japanese yen have hampered the growth of Japan's export-focused companies. With the increasing borrowing costs in Spain and Italy, the debt crisis in Europe has revived, consequently affecting Japan's market sentiments adversely. Investors have withdrawn from risky assets, leading to a stronger yen.
Japan's industrial production declined in April from the previous month, according to the revised data released by the Trade Ministry earlier in June. The revised data reported that industrial output fell 0.2 percent in April, raising concerns about the country's faltering economic growth momentum.
A major worry for Japan is the fact that the country's electronic sector is seriously affected by the strengthening of the yen. Japanese electronics companies are finding that they are no longer able to keep the prices at competitive level in the international market.
Another concern is Japan's unemployment rate, which, according to the data released by internal affairs ministry, rose to 4.6 percent in April from 4.5 percent in March. Employment conditions in Japan do not seem to improve with major companies such as Sony Corp, NEC Corp and Renesas Electronics Corp announcing job cuts as they are attempting to trim expenses.
In May, the sovereign credit status of Japan was cut to A+ from AA by Fitch Ratings. It commented that the downgrades and negative outlooks reflected growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios.