JAPAN'S trade deficit rose nearly 10 percent in May to 993.9 billion yen (US$10.5 billion), highlighting the challenge Prime Minister Shinzo Abe faces in revitalizing manufacturing as industries increasingly shift production offshore.

Rising costs for imports due to the cheaper yen matched a 10 percent rebound in exports from a year earlier, the Finance Ministry said yesterday.

A weakening in the yen's value has pushed up costs for imports of crude oil, natural gas and other commodities for this resource-scarce nation, but the deficit in May was bigger than most economists' estimates.

Strong growth in exports to the US, China and the rest of Asia was offset by even stronger imports from the Middle East and China.

While robust imports suggest that demand inside Japan is recovering, growing deficits show that Japan's trade environment has changed for good, said Eiji Ogawa, an economist at Hitotsubashi University in Tokyo.

"Just a while ago, Japan always enjoyed a surplus," Ogawa said at a conference yesterday. "It's now clear the deficits are not temporary, but structural."

Japan's economy grew at a 4.1 percent annual rate in the first quarter of this year and is forecast to continue its recovery this year, fueled by government stimulus spending and aggressive monetary easing aimed at ending two decades of stagnation.

But sustained growth will depend on getting Japan's cash-rich corporations to do more hiring and spending at home - a tough sell given the rapid aging and shrinking of the Japanese population.

The May data show Japan's efforts to boost trade with the rest of Asia are yielding results, with exports rising 11 percent to 3.2 trillion yen, as imports climbed nearly 10 percent to 2.98 trillion yen.

Exports to China rose 8.3 percent in May from a year earlier to 1.05 trillion yen while imports jumped 15 percent to 1.46 trillion yen, leaving a deficit of 410 billion yen.

Japanese companies are also expanding their manufacturing in Southeast and South Asia, partly to tap new, faster growing markets and partly to hedge risks from their already huge commitments in China, given the threat of anti-Japanese moves due to a territorial dispute with China.

Economists say Abe must proceed with promised tax cuts and deregulation to spur investment and hiring by corporations that say inflexible labor laws, high taxes and wages are hurting them.