By Tetsushi Kajimoto
TOKYO (Reuters) - A surge in car shipments spurred Japanese exports to their biggest annual increase in three years in October, suggesting a gradual pick up in global demand will help underwrite a sustainable recovery in the world's third-largest economy.
The 18.6 percent increase in exports in the year to October blew past the median market forecast for a 16.5 percent rise and accelerated from a 11.5 percent gain in September, data by the Ministry of Finance showed on Wednesday.
Significantly, exports also rebounded in volume terms, rising 4.4 percent from a year earlier, in a sign the global economy is gradually recovering mainly on strength in advanced nations.
Sluggish exports have been a source of concern for policymakers as shipment volume has struggled to pick up despite a weak yen this year due to slowdown in emerging economies, which faced capital outflows on expectations the U.S. Federal Reserve would soon roll back its massive monetary stimulus.
While the yen has fallen around 14 percent against the dollar in 2013, exports growth has largely disappointed early expectations.
The Japanese economy has been humming along nicely this year on the back of Prime Minister Shinzo Abe's massive monetary and fiscal expansionary policies, dubbed Abenomics. Still, headwinds from weak capital spending and depressed global demand have somewhat clouded the outlook.
The October data should provide some relief for the government, which is hoping a recovery in overseas demand will cushion the blow from a sales tax hike next April, which could crimp private consumption
"U.S. private-sector demand remains strong and European economies appear to be bottoming out. If advanced economies recover, Japanese exports can rise more," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
The volume of exports to the United States and European Union grew 5.3 percent and 8.0 percent year-on-year in October respectively, while Asia-bound shipments rose just 2.0 percent, highlighting a two-track recovery in the global economy.
Car shipments rocketed 31.3 percent on-year in October, making the biggest contribution to the value of exports in the month, while they also rose a strong 7.5 percent in volume terms.
Highlighting brisk demand in the United States, Toyota Motor Corp <7203.T> is racking up strong sales in the U.S. market and closing in on a record profit set before the Lehman crisis, while reaping the benefits of a weak yen that has boosted its profit margins.
On a seasonally adjusted basis, exports rose 1.5 percent in October from the previous month.
Soft exports -- particularly to emerging economies -- have been a key concern for Bank of Japan policymakers, who meet on Wednesday and Thursday to discuss monetary policy and the economic outlook. The bank is widely expected to keep monetary settings unchanged.
The Japanese economy, the fastest growing in the developed world this year, slowed in July-September from the previous quarter as domestic private demand moderated and exports weakened.
Growth is expected to accelerate again in the current quarter helped by a recovery in exports as well as brisk private consumption ahead of the sales tax hike.
Sparking inflation and putting the economy on a sustainable footing over the long run is Abenomics' ultimate goal, and analysts expect a healthy global economy to ease the path ahead.
Recovering demand for Japanese goods would also help address another concern -- persistent red ink in the trade balance.
The deficits have raised concerns about Japan's ability to finance its debt in the long term, as they weigh on the country's balance of payment and add to strains caused by its debt burden, the worst among industrial nations.
Japan logged a trade deficit of 1.09 trillion yen ($11 billion) in October, a record for the month, more than a median forecast of 813.5 billion yen, as imports rose 26.1 percent on the back of expensive fuel purchases to make up for nuclear plants shuttered since the 2011 Fukushima disaster.
The October imports was also bumped up by a 67.8 percent spike in crude oil imports, which reflected a big drop a year before due to an oil tax hike aimed at curbing greenhouse gas emissions, finance ministry officials said.
($1 = 100.2050 Japanese yen)
(Writing by Leika Kihara and Tetsushi Kajimoto; Editing by Shri Navaratnam)