JAPAN TRADE SURPLUS NARROWED

- Japan's trade surplus narrowed in July as automobile exports cooled, heightening concern that growth in the world's second-largest economy may slow.

The surplus fell 21.1 percent to 671.2 billion yen ($5.9 billion), the Finance Ministry said in Tokyo today. The median estimate of 35 economists surveyed by Bloomberg News was for 844 billion yen.

A U.S. housing crisis sparked a global sell-off of shares and drove the yen to a 4 1/2 month high last week, prompting concern that profit at exporters including Toyota Motor Corp. will be hurt by waning U.S. demand and a stronger currency. Exports have driven Japan's longest economic expansion in more than 60 years.

``Prolonged market turmoil could hurt consumer sentiment in the U.S., which would have a considerable impact on exports,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``Should the yen strengthen abruptly that would really weigh on exports and production, leaving the economy without anything to rely on for growth.''

Exports rose 11.7 percent last month, less than the 13 percent expected by economists and 16 percent in June. Imports climbed 16.9 percent, more than the 16.1 percent prediction and 11 percent gain in the previous month.

The yen traded at 114.32 per dollar at 9:07 a.m. in Tokyo from 114.33 before the report was published.

Chipmakers Pare Spending

Global demand is already showing signs of slowing. Advantest Corp., the world's largest maker of memory-chip testers, said profit for the three months ended June 30 slid 13 percent as chipmakers pared spending.

The slowdown in export growth restricted the economy's expansion to an annual 0.5 percent pace in the second quarter, less than a sixth of the 3.2 percent in the first three months.

The U.S. Federal Reserve cut the rate at which it lends to banks last week in an effort to prevent the subprime mortgage collapse from causing an economic slowdown. The housing slump is weighing on growth in the world's largest economy, which expanded at an average of 2 percent in the first half of 2007 compared with 3.6 percent in the same period a year earlier.

The yen gained at least 3 percent against the 16 most- traded currencies last week, prompting investors to sell shares of Toyota and other exporters, whose earnings are eroded when the currency strengthens.

Stocks Rally

Still, stocks rallied and the yen weakened following the Federal Reserve's Aug. 17 discount-rate cut. The benchmark Topix index yesterday capped off its biggest two-day rally since 2004 on speculation the worst of the subprime crisis is over for Japanese companies.

Bank of Japan Governor Toshihiko Fukui and his policy board begin a two-day meeting in Tokyo today to decide whether to raise the benchmark overnight lending rate from 0.5 percent. Only three of 46 economists surveyed by Bloomberg News expect a rate increase at the meeting.

``The BOJ won't want to do anything to spur the yen higher,'' said Junichi Makino, a senior economist at Daiwa Research Institute in Tokyo. ``They won't want to raise rates until they can confirm that markets have calmed down.''

Economists including Sumitomo's Muto say demand from emerging markets will probably pick up the slack from lackluster U.S. sales. Asian and emerging markets account for almost two- thirds of Japan's shipments abroad.

Toyota's Profit

Profit at Toyota, Japan's largest automaker, surged 32 percent to a record in the three months ended June 30, thanks to a weaker currency and Asian demand.

``The Asian market is recovering,'' Toyota Senior Managing Director Takeshi Suzuki said this month. ``Even if the yen gets stronger from the fiscal second quarter, we plan to maintain a double-digit operating margin.''

China's economy grew 12 percent in the second quarter, the fastest rate in 12 years, and Hong Kong expanded 6.9 percent, outpacing the 3.4 percent annualized growth in the U.S., the world's largest economy.

``U.S. exports have been a little weak, but demand from other regions has been very solid, said Noriaki Haseyama, an economist at Dai-Ichi Life Research Institute. ``We expect the surplus to keep expanding as global growth fuels export demand.''