The 20.1 percent annual slump in exports to China, Japan's main export market, condemned Tokyo to a record monthly trade deficit, stark evidence of the pain from a firm yen, the global slowdown and fuel imports to make up for idled nuclear plants.

Japan's shortfall with China was 587.9 billion yen ($7.4 billion), 40 percent of the total trade deficit for January, Japanese finance ministry data showed.

While the drop in exports was exacerbated by an early Lunar New Year holiday hitting shipments of steel and other manufacturing inputs, it was still the fourth straight month the Japanese exports to China have fallen in annual terms.

"Chinese authorities may already be worrying about weakening demand," said Mari Iwashita, chief market economist at SMBC Nikko Securities, pointing to Saturday's policy easing with a 50 basis point cut in banks' reserve requirement ratio, the amount of cash banks must hold in reserves.

The move by the Chinese central bank will boost lending capacity by an estimated 350 billion to 400 billion yuan ($55.6-63.5 billion) in a bid to crank up credit creation.

The Chinese Lunar New Year holiday, which fell in late January this year but in early February last year, pushed down what was already declining demand in China, with Japanese exports falling for almost all items, a MOF official said.

Chinese data shows sharp falls in imports from its main trading partners in January, consistent with the Lunar New Year distorting regular trade, but it also shows import demand had been slowing in the final quarter of 2011.

Japan has also been hit by declining demand elsewhere. Its trade surplus with the European Union shrank to its smallest ever, at just 689 million yen, as exports dipped 7.7 percent.

And as Asia's exports to Europe slumped due to the economic turmoil, so did Japan's exports of semiconductors and plastics to the rest of Asia, the MOF official said.

Japan's total trade deficit for January was 1.475 trillion yen ($18.59 billion), bigger than the median forecast of 1.468 trillion yen in a Reuters poll and more than 50 percent larger than the previous record of a 967.9 billion yen deficit in January 2009, in the wake of the global financial crisis.

The dollar fell some 30 pips to 79.58 yen from a six-month high hit just before the data as short-term accounts locked in profits.

The dollar has been gaining strength against the yen since the Bank of Japan surprised markets last week with a 10 trillion yen increase in its asset buying program and by setting an inflation goal of 1 percent.

SECOND-HALF IMPROVEMENT

Exports slumped 9.3 percent in January from a year earlier, slightly less than the median market estimate of 9.5 percent but still the fourth straight month of declines, indicating that the economy could struggle to recover even as reconstruction proceeds from last year's earthquake and tsunami.

Imports grew 9.8 percent from a year earlier, exceeding the median estimate for a 9.5 percent annual rise. JPEXPY=ECI

Japan has logged deficits in January for five of the past seven years, including this year. As seasonal factors influenced the data, economists expect exports to recover, albeit slowly, given signs of a pickup in demand from the United States.

"The trade balance is likely to return to surplus in the latter half of this year as the slowdown in emerging nations' economies is expected to come to an end around April-June," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Still, the figures feed into concerns about how much longer Japan can rely on exports to help offset its huge public debt.

Japan logged its first annual trade deficit in more than 30 years for 2011 in the aftermath of the March earthquake, which hurt exports and raised fuel import costs.

"The deficit is unlikely to keep rising going forward given signs of recovery in overseas demand, such as inventory adjustment having run its course in the United States," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management.

"However, there is a possibility that Japan will see a prolonged trade deficit depending on the situation in the Middle East and crude oil prices."

Japan's economy, the world's third largest, shrank more than expected in the October-December quarter as flooding in Thailand, a strong yen and weak demand hurt exports, after rebounding in the third quarter from an earthquake-triggered recession.

($1 = 79.3600 Japanese yen)

(Additional writing by Stanley White; Editing by Edmund Klamann and John Mair)

• A Permanent Economic Emergency