Japan's exports fell in March at a faster pace than economists expected, in a sign that shipments will continue to weaken and hurt economic growth after last month's earthquake and tsunami sparked a nuclear crisis and disrupted supply chains for many manufacturers.

The data offers the first glimpse of how the supply side has struggled since the natural disaster that struck Japan's northeast coast on March 11, and it suggests Tokyo's trade balance will swing to a deficit as some companies struggle with a shortage of electricity and needed parts.

Japan's economy is likely to contract in the second quarter and then resume growing in the third quarter as efforts to rebuild the northeast take hold. But damage to supply chains and factory output could linger, depriving the export-focused country of a vital contribution to gross domestic product and setting the stage for further easing by the central bank.

As supply chains are expected to recover in late May, the drop in exports may prove short-lived, said Yuichi Kodama, economist at Meiji Yasuda Life Insurance.

But due to power supply constraints expected in the summer, a full pickup in exports is unlikely until at least the end of this year. The Bank of Japan is likely to be prompted to ease its policy further in coming months.

Exports fell 2.2 percent in March from a year earlier, more than a median forecast for a 1.5 percent annual fall. That marked the first decline in 16 months. Imports rose 11.9 percent from a year earlier against a forecast for a 6.0 percent annual rise, trade data issued by the Finance Ministry showed.

Exports dropped 7.7 percent from February on a seasonally-adjusted basis. This was the biggest month-on-month fall since January 2009.

CAR EXPORTS TUMBLE

Exports of cars tumbled 27.8 percent from a year earlier, making the biggest contribution to the decline in overall exports. Semiconductors and electronics fell 6.9 percent from a year ago.

Among Japan's two major export destinations, shipments to China rose an annual 3.8 percent while shipments to the United States fell an annual 3.4 percent, the first decline since December 2009.

The trade balance came to a surplus of 196.5 billion yen ($2.38 billion), much less than the median estimate for a 493.6 billion yen surplus.

Global makers of products from cars to mobile phones are finding it harder to get the parts they need after Japan's earthquake and tsunami wrecked supply chains, and investors worry that the worst is yet to come for earnings.

Toyota Motor Co <7203.T> said it would cut U.S. vehicle production and might have to lower its full-year U.S. sales targets if parts shortages extend into the summer.

The fall in exports suggests that industrial production data for March, which is due on April 28, could also slow sharply. The Bank of Japan holds a policy meeting on the same day and will issue a twice-yearly outlook report on the economy and prices that includes long-term GDP and consumer price forecasts.

BOJ SEEN HOLDING FIRE

The BOJ is expected to hold off on any further easing next week but will consider giving clearer signals to the market that surging commodity costs alone would not shake its commitment to ultra-easy policy, even if they nudge up consumer prices, sources familiar with the central bank's thinking have told Reuters.

The BOJ does not see the need to ease policy further anytime soon, given expectations for the economy's return to a moderate recovery after a temporary slump, said Takeshi Minami, chief economist at Norinchukin Research Institute.

The timing of future easing would depend on the pace of recovery in output which is expected to pick up gradually.

The BOJ's next move might be to expand its asset-buying program or boost its outright JGB buying from the market, Minami said, adding that it could come as early as July when it reviews the outlook report and the government compiles a second extra budget involving more bond issuance to fund reconstruction.

Japan aims to compile this month an emergency budget worth 4 trillion yen, which will be followed by more spending packages, as it faces its worst crisis since World War Two after the 9.0 magnitude earthquake and a tsunami devastated its northeast.

Japan's economy is expected to contract in the current quarter but will grow again in July-September on reconstruction efforts, a Reuters poll showed. Some economists say gross domestic product may have contracted in January-March, meaning three straight quarters of contraction to June cannot be ruled out.

(Editing by Edmund Klamann and Richard Borsuk)

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