By Lisa Twaronite

Japan's current-account surplus fell more than expected in July, government data showed Tuesday, hit by a fall in net returns on overseas investments.

The Finance Ministry said the current account, the nation's broadest measure of trade with the rest of the world, posted a 19.4% smaller surplus from the same month a year earlier, falling to an unadjusted 1.27 trillion yen ($13.6 billion).

The result represented a much deeper drop than the 0.1% drop expected by economists polled by Nikkei and Dow Jones Newswires.

The income surplus dropped 24.2% on year to 1.25 trillion yen, with reports quoting a ministry official as saying revenue from Japanese subsidiaries abroad fell amid the slumping global economy.

The service account deficit rose 28.9% on year in July to 288.3 billion yen. But the trade surplus up rose 42.3% to 437.3 billion yen, as exports fell 37.6%, and imports fell 41.2%.

"Japanese exports have firmed from record -49.5% [year on year] in February, but the improvement from the Q1 lows continues to trail the magnitude of the pick-up seen in other leading Asian exports," said economists at Action Economics.

"In the face of ongoing sluggishness in domestic demand, exports remain key for sustaining recovery from the severe Japanese recession," they said.

The current-account data is broader than the trade data because it includes not only trade in goods and services, but also income from investment, such as dividends and interest payments.

"The current account has shrunk by almost 20% from the previous year and is a factor playing into the sharp deterioration in Japan's basic balance position -- sum of direct investment plus portfolio flows plus current account -- over recent months," said Mitul Kotecha and Sebastien Barbe, Hong Kong-based analysts at Credit Agricole's Calyon investment banking unit.

The data report "provides some more ammunition for Japanese yen bears," they wrote in a research report Tuesday.

"Markets became increasingly long-Japanese yen around the election ... but there is growing risk of a long Japanese yen shake-out, given that positioning is well above the three-month average," they said. "For now, dollar/yen continues to pivot around the 93.00 [yen] level, but we favor a downside bias for the yen."

The dollar was buying 92.78 yen in Asian Tuesday morning trading, down from 92.94 yen in late London trading Monday. U.S. markets were closed Monday for the Labor Day holiday.

Loan growth slows

A separate set of data Tuesday from the Bank of Japan showed bank lending rose 1.8% on year in August, slowing for the seventh straight month and marking the smallest increase since September 2008's 1.6% rise.

Japan's three megabanks, Mitsubishi UFJ Financial Group Inc. (MTU), Mizuho Financial Group Inc. (MFG), and Sumitomo Mitsui Financial Group Inc. (SMFJY) were down 2.7%, 2.9% and 3.2%, respectively, outpacing the broader market's losses.

Japan's benchmark Nikkei 225 Stock Average was down less than 0.1%, after being narrowly positive in earlier trading. The broader Topix index of all issues on the Tokyo Stock Exchange's First Section was down 0.4%.

Other regional markets were mixed, with South Korea's Kospi up 0.2%, and Australia's S&P/ASX 200 up.1.0%. New Zealand's NZX-50 was 0.1% higher.

The Shanghai Composite was down 1.4%, while Hong Kong's Hang Seng Index was 0.3% higher.