Japan's financial system may have escaped the worst of the credit crisis, but the country's critical export sector has been hit hard by the sudden weakening in global demand.
A surging yen and weaker South Korean won has eroded Japan's competitive edge in exports as well. Still, U.S. and Japanese economic stimulus packages could help buck up demand. How exporters themselves adapt products and pitches to appeal to stingier overseas consumers will help determine how well they survive bleak times, too.
For September, Japan's trade surplus shrank a greater than expected 94.1%, compared with last year's corresponding period, to 95.1 billion yen ($974.1 million), Japan's Finance Ministry said Thursday. Analysts had forecast a 63% contraction. Exports climbed 1.5%, compared with last year's similar period, to 7.26 trillion yen ($74.4 billion) while imports grew 28.8%, the fastest pace since 2006, to 5.65 trillion yen ($57.9 billion).
Exports to the United States fell 10.9% from a year earlier, after posting their biggest-ever fall of 21.8% in August. It was the 13th straight monthly decline. Exports to the European Union fell 9%, their fourth fall in the last five months. Shipments to Asia, which have held up in the face of problems elsewhere, rose only 2.9%.
Demand has weakened significantly in Japan's biggest export markets, China and the United States. China reported slower-than-expected economic growth for the third quarter that fell below 10% for the first time in five years (See " Single-Digit Growth In China: Here To Stay"). Meanwhile, U.S. retail sales fell in September for the third consecutive month (See " Americans Still Repelled By Stores"). U.S. sales for Toyota Motors (nyse: TM - news - people ) plummeted 29.5%. Electronics conglomerate NEC (other-otc: NIPNF - news - people ) on Wednesday cut its full-year net earnings forecast by 57%, blaming falling demand for mobile phones and computer chips.
The surging yen has brought manufacturers more bad news, as it makes exports more expensive. Worsening the blow, competing South Korean exports have been made cheaper abroad due to the steep slide of the won. The yen, which strengthened to a five-year high against the euro on Thursday and passed the 100-yen mark against the dollar earlier this month, while the South Korean won has slid 31.0% this year (See " Korea Looks After Number Won").
For Japan, all signs seem to point to recession. The world's second-biggest economy contracted 0.6% in the second quarter and the government warned last week that the downturn was likely to continue given the increasing signs of slowing throughout Asia.
Both the U.S. and Japan are considering economic measures to revive demand. Japanese Economic Minister Kaoru Yosano said last week that the government is preparing an economic stimulus package, to be revealed by November. U.S. Fed Chairman Ben Bernanke said this week he supported a significant stimulus package by Congress.
With U.S. sales slumping, some Japanese automakers aren't just laying off workers and cutting manufacturing capacity but resorting to Detroit-style incentives they once shunned, such as zero-interest financing to lure U.S. consumers (See " Woes Of U.S. Automakers Spread To Japan"). Others are shifting from luxury or large vehicles to popular, more compact cars (See " Nissan, Hyundai: Flashy Cars A Non-Starter").
