gopalakrishna

* Japan June exports unexpectedly fall as Asia demand slows

* BOJ Mizuno says downside risks more worrying than inflation

* Mizuno says core consumer inflation could reach 2.5 percent
(For more stories on Japan's economy click [ID:nECONJP])

By Leika Kihara

TOKYO, July 24 (Reuters) - Japan's exports unexpectedly fell
in June for the first time in nearly five years as shipments to
emerging markets sputtered after sustaining growth through the
first year of the global credit crisis.

Exports to Asia expanded at their weakest pace in three years
with demand in China, Japan's biggest customer, growing at less
than half the pace of May. Shipments to the United States fell
for a 10th month and to Europe for a second month.

China and other emerging markets have largely escaped the
initial impact of the global credit crisis triggered by U.S.
mortgage defaults. But with the world's main export markets in
Europe and North America reeling from bank failures and a lending
squeeze, a global slump looks increasingly likely.

"Exports to many Asian countries fell from the previous year,
which suggests intra-regional trade in Asia may be losing
momentum," said Maiko Noguchi, senior economist at Daiwa
Securities SBMC.

"If the slowdown in the United States and Europe continues,
that will affect Asian economies. Demand from emerging economies
alone will not be enough to lead export growth," she said.

Financial markets showed a muted response to the data.

Japan's exports fell 1.7 percent in June from a year earlier,
marking the first fall in 55 months. Economists had forecast a
3.8 percent rise.

Exports to Asia rose 1.5 percent, the slowest pace since May
2005. China-bound shipments climbed 5.1 percent, compared with a
12.2 percent rise in May.

OUTLOOK

The fall in exports is a worrying sign, fanning the view that
the world's second-biggest economy contracted in the April-June
quarter and raising the prospect that the expansion since 2002,
Japan's longest in the post-war period, could be coming to an
end.

The government has already conceded that the expansion may be
approaching a turning point. The economy relied heavily in the
first quarter on overseas demand for Japanese products to record
quarterly growth of 1 percent.

"The data suggests that the contribution of net exports to
GDP in April-June will probably turn out as zero or negative,"
said Junko Nishioka, an economist at the Royal Bank of Scotland.

"Given weakness in personal consumption and capital spending,
the question now is not whether GDP has contracted in the second
quarter, but how much it has contracted."

Indeed, if demand from emerging markets continues to falter,
the Bank of Japan may have to cut its growth forecast again, said
Atsushi Mizuno, a hawkish member of the central bank's policy
board.

Just last week, the central bank cut its economic growth
forecast for the year to March 2009 to 1.2 percent, which would
be the slowest pace in six years, and predicted the fastest
inflation in a decade. [ID:nT178013]

"The fog hanging over Japan's economy is unlikely to clear
any time soon," Mizuno said in speech to business leaders in
Aomori, northern Japan, pointing to the negative impact of rising
costs for energy and raw materials.

He also told a news conference that he was more concerned
about downside risks to the economy than inflation.

MIZUNO CAUTIOUS

Mizuno said U.S. economic growth may not return to its
potential levels until 2010 and financial markets are far from
normalising.

Economists said Mizuno's comments and expectations that a
recovery in the U.S. economy will be slow in coming put back any
possibility of raising Japan's interest rates, currently just 0.5
percent, despite quickening inflation.

"It is certain that Mizuno's comments today suggest that the
timing for a rate hike could be later than expected, given that
he said a recovery in the U.S. economy may be delayed until
2010," Takeshi Minami, chief economist at Norinchukin Research
Institute, said.

Swap contracts are pricing in about a 20 percent chance of a
rate hike by the end of this year MIRS6. [ID:nT178013]

Mizuno said Japan's annual core consumer price inflation
could reach around 2.5 percent later this year, from a current
decade high of 1.5 percent, but added that would not lead to a
broad-based increase in prices and wages.

The central bank scrapped a tightening bias in April to adopt
a neutral stance on policy.
($1=107.93 Yen)
(Additional reporting by Hideyuki Sano in Aomori; Editing by
Michael Watson, Dayan Candappa and Neil Fullick)

__________________
[SIZE="2"][/size]