TOKYO (Reuters) - Japan's exports tumbled by 10.3 percent in the year to September, their sharpest decline since the aftermath of last year's earthquake, and the Bank of Japan cut its outlook for local regional economies due to a row with China and weak global demand.
Manufacturers' sentiment in October hit the lowest since early 2010, separate data showed, reinforcing concerns that Japan may slide back into recession as sales to China and Europe sag and rebuilding from last year's earthquake and tsunami disaster loses momentum.
The fall in exports was more than a 9.6 percent annual decline 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. JPEXPY=ECI
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.
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 as some Chinese consumers shunned Japanese cars and other products.
The weak figures pile pressure on the BOJ 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.
"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," added Iizuka, noting that the BOJ was likely to ease policy further next week and cut its estimate of 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 as Europe's debt crisis remains entrenched.
Japanese carmakers reported tumbling sales in China for September - with Toyota Motor Corp's (7203.T) slipping by almost half - confirming the impact of the territorial dispute.
The BOJ cut its economic assessment for eight out of nine regions in Japan, the central bank said in a quarterly report, as growth paused due to the slowdown overseas.
That was the largest number of downgraded regions since January 2009, when the central bank cut its assessment for all nine regions for two straight quarters in the wake of the failure of Lehman Brothers.
"Global economic uncertainty remains high, and we must be vigilant to the effect of financial and currency moves on the economy and prices," BOJ Governor Masaaki Shirakawa said in a speech at a quarterly meeting of the central bank's regional branch managers.
"The BOJ will continue to pursue easy monetary policy via steady purchases of assets," he said.
After loosening policy in September by boosting its asset-buying program, the central bank has been under renewed political pressure to ease again at next week's policy review as a prolonged slowdown in China hits the export-reliant economy.
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 lowest since January 2010.
Many firms cited anti-Japanese sentiment in China as a negative factor. The manufacturing index is expected to improve only slightly to minus 13 in January.
Writing by Stanley White; Additional reporting by Tetsushi Kajimoto; Editing by Eric Meijer