Japan has posted its biggest ever monthly trade deficit with China, amid signs that the US may be poised to supplant China as the nation's top export destination.
Government data on Wednesday showed that Japan's exports to China fell 12 per cent in October from a year earlier to Y948 billion (USD 12 billion), as shipments of cars and machinery were knocked by the territorial dispute between Asia's two largest economies.
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Meanwhile, Japan's imports from China were up 4 percent from a year earlier to Y1.35 trillion, buoyed by strong demand for the China-assembled iPhone 5.
Excluding the distorting effects of Chinese new year holidays, which have driven the monthly bilateral trade balance deeper into negative territory three times since 2006, the resultant deficit of Y406 billion was easily the widest in records going back to 1979.
The figures are the clearest indication yet that the spat over a chain of islands in the East China Sea is deepening Japan's export-led downturn, potentially dragging the world's third-largest economy into a technical recession. Third-quarter economic data, reported last week, showed that a slump in net exports led by China and the EU was the main contributor to an overall 0.9 percent contraction in gross domestic product between July and September.
Kiichi Murashima, chief economist at Citi in Tokyo who expects a 0.4 percent contraction in the three months to December, said that after Wednesday's trade data, "I no longer have any doubt that Japan is in recession."
The diplomatic flare-up in mid-September, triggered by Tokyo's decision to nationalise a group of islands also claimed by China, led to a 6 percent fall in export volumes in October, according to Citi estimates - the largest since the post-earthquake period.
Shipments of motor vehicles led the declines, falling 84 percent on the year, in value terms. That was the biggest slide since a 91 percent fall in October 2001, in the wake of then-prime minister Junichiro Koizumi's visit to the controversial Yasukuni Shrine, which also inflamed tensions between Tokyo and Beijing.
The provisional ministry of finance figures also suggested that the US may be poised to topple China as Japan's top destination for exports - a position it surrendered early in 2009, following China's aggressive post-Lehman stimulus.
In October - the fourth successive month of falling Japanese exports to China - the gap was just Y27 billion in China's favour, while Japan's ports saw a big pick-up in US-bound shipments of cars and car parts.
"The past decade's trend in the relative importance of Japan's two major export markets may already be reversing," said Jonathan Allum, a strategist at Mizuho in London, before the release of the data on Wednesday.
Recent remarks from car dealers in China suggest that demand is recovering. On Wednesday Kunihiko Ogura, president of GAC Toyota, told a press briefing at Guangzhou that retail sales were close to normal levels, and that the joint venture's longstanding expansion plans were intact.
And in a sign that relations between Tokyo and Beijing may be thawing, China, Japan and South Korea announced this week the formal launch of negotiations on a proposed trilateral trade agreement. The pact would lower tariffs and smooth trade between the three northeast Asian neighbours.
Yoshihiko Noda, the Japanese Prime Minister, is seeking to include plans to participate in such trade agreements, and for bilateral deals with the EU and Australia, in his ruling Democratic party's manifesto for a general election set for December 16.
"It is in our nation's interest to promote high-level economic co-operation," Noda told the Financial Times in an interview on Sunday.
However, any improvement in Japan's trade outlook may come too late to avert two consecutive quarters of contraction. The Bank of Japan, which kept monetary policy hold on Tuesday, weakened the tone of its monthly economic outlook on Wednesday, noting that the slowdown in overseas economies had started to affect domestic demand.