Japan's exports surged 14.7% in August

Imports also improved 16%.

According to BBVA Research, Japan's August exports rose by 14.7% y/y (consensus: 14.5% y/y), extending a positive trend, boosted by competitive gains from the yen’s weakness and improving external demand.

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Together with a 16.0% y/y (consensus: 18.5%) rise in imports in August, the merchandise trade deficit narrowed slightly to ¥0.96 trillion (consensus: ¥1.1 trillion) from ¥1.0 trillion in July.

Meanwhile, the all industry activity index was reported today to have risen by 0.5% m/m in July (consensus: 0.3%) from -0.7% in June.

The improving growth momentum has boosted the government’s confidence in going ahead with the planned consumption tax hike in 2014 (from 5% to 8%, and from 8% to 10% in 2015).

The government has reportedly agreed to offset the contractionary impact of the consumption tax hike with a cut in the corporate taxes.

The government faces a daunting challenge of reigning in the fiscal deficit to bring the public debt (240% of GDP) back on a sustainable path. For details, see our Economic Watch on Japan.