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Export growth in February unexpectedly picked up as weakness in exports to the US was largely offset by continued strong exports to Emerging Markets. In February, export growth in current prices accelerated to 8.7% y/y from 7.7% y/y in January (see chart below). Looking at the most recent trend, export growth has - at least for the moment - stabilised at around 2.5% 3m/3m growth. Exports to the US have plunged in recent months (-5.0% 3m/3m in volume terms) and is currently just as weak as during the last US recession in 2001 (see charts). However, export growth to Emerging Markets has accelerated in recent months, offsetting most of the weakness in US exports. Exports to Asia - more than twice as important as the US market - are growing by close to 5% 3m/3m

The trade balance surplus was less than expected due to continued strong import growth (+10.1%y/y). However, this is mostly the price impact from higher energy and commodity prices as import growth in volume terms has actually declined slightly in recent months (see chart). In volume terms, export growth is still significantly higher than import growth, implying there will continue to be a significant boost to GDP growth in Q1 08.

Implications:

Net exports will most likely continue to contribute 0.3.-0.4%-point to GDP-growth in Q1 08, in our view, and with housing construction recovering there even could be some slight upside on our 0.5%q/q forecast for GDP growth in Q1. That said, we do expect export growth to slow as growth starts to slow outside the US and the stronger JPY starts to impact market shares and profitability in corporate Japan. However this impact will mainly start to hurt in H2 08.

With GDP at least looking OK in the short term, the Bank of Japan (BoJ) will probably continue its wait and see attitude. We expect the BoJ to be on hold. We will not completely rule out the possibility of a rate cut in Japan, but believe it is unlikely to happen in H1 08 as the short term growth outlook at least looks resilient.

Danske Bank
http://www.danskebank.com/danskeresearch

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