Japan's exports tumbled at their sharpest pace since the aftermath of last year's earthquake in the year to September, while manufacturers' mood hit its lowest since early 2010, data published on Monday showed, a sign the diplomatic row with China is further hurting the export-reliant economy.
The latest data reinforce concerns that Japan, the world's third largest economy, may slide back into recession as sales to China and Europe sag amid the global slowdown and demand at home led by rebuilding from last year's earthquake and tsunami disaster loses momentum.
They weak figures pile pressure on the Bank of Japan to stimulate the economy, and it will likely cut its economic forecasts and ponder further easing monetary policy at its October 30 meeting, according to sources familiar with its thinking.
Exports fell 10.3 percent in the year to September, against a 9.6 percent drop expected by economists, down for four months in a row, as shipments of cars, ships and electronics slumped, Ministry of Finance data showed on Monday.
It matched the decline registered in May 2011 and posted the sharpest fall since April that year after the massive earthquake and tsunami devastated Japan's northeast and crippled supply chains.
Separately, Japanese manufacturers' sentiment hit its lowest since January 2010 and is expected to stay negative in the coming months, a Reuters poll showed, with many firms citing anti-Japanese sentiment in China as a negative factor.
Adding to concerns about China's slowdown, Sino-Japanese ties have deteriorated sharply since last month when a row over disputed islands led to violent anti-Japanese protests across China and badly hurt trade.
"The worsening of exports reflected both the global slowdown and anti-Japan protests in China. Exports will likely fall even further and the trade deficit will grow in October as the impact from the boycotting of Japanese products will play out more clearly in October," said Naoki Iizuka, an economist at Citigroup Global Markets Japan in Tokyo.
"The slowdown in exports to China will likely hit sectors such as automobiles, electronics and general machinery harder in the coming months, and that could further dampen Japanese firms' capital spending," Citigroup's Iizuka said, adding that the BOJ was likely to ease policy further next week and cut its estimate on export performance.
Prime Minister Yoshihiko Noda told his cabinet last week to prepare a fresh stimulus package by next month, but the plan's limited scope and lack of detail failed to impress markets.
Exports to China, which overtook the United States as Japan's top market in 2009, fell 14.1 percent in September from a year earlier, the biggest decline since January. Shipments to the European Union also dropped a striking 21.1 percent.
Shipments to the United States, the No. 2 export destination for Japan, rose an annual 0.9 percent, sharply slowing from a 10.3 percent gain in August. U.S.-bound shipments stood at 933 billion yen ($11.75 billion), closer to exports to China worth 954 billion yen.
Japanese carmakers reported tumbling sales in China for September - with Toyota's almost halving - confirming the impact of a territorial row between the two countries and raising concerns about their future in the world's biggest auto market.
Japan recorded a trade deficit of 558.6 billion yen in September against a 570.1 billion yen gap expected, a record amount for the month of September.
It was the third straight month of trade deficits, in a worrying signal that Japan's ability to finance its debt may be gradually diminishing, while companies are shifting their production overseas to cope with the strong yen.
In the Reuters Tankan for October, the manufacturers' sentiment index, derived by subtracting the percentage of pessimistic responses from optimistic ones, fell 12 points to minus 17, the sharpest drop since the aftermath of the March 2011 earthquake.
The manufacturing index is expected to improve only slightly to minus 13 in January.
Japan's economy outperformed most of its peers in the Group of Seven in the first half of this year, helped by solid private consumption and reconstruction spending.
However, weak external demand and a strong yen have led analysts to project growth will likely stall for the rest of this year, with some anticipating Japan may fall back into recession.
($1 = 79.3800 Japanese yen)
(Editing by Tomasz Janowski and Eric Meijer)