Economists say imports could well stay stuck in the doldrums, but the strong yen will help cap gains in the surplus in coming months by making Japanese exports more expensive overseas.

Japan's touchy surplus with the United States rose by about a third in 1998 to 6.70 trillion yen -- its highest level since 1987 -- and was up 23 per cent in December alone.

But the finance ministry said the value of Japanese steel exports to the United States -- a key trade friction flash point -- fell 20.8 per cent in December from a year earlier to 23.78 billion yen. The volume of those exports declined 14.9 per cent to 364,000 tonnes.

US steel companies have filed anti-dumping suits against Japanese steelmakers as well as those from Brazil, South Korea and Russia, and some USsenators are backing legislation to make it easier to protect the industry from import surges.

US trade officials have said Japan needs to cut its steel exports to America sharply or face possible retaliation and that they would look at December's data to see if the trend was down.

Deputy US trade representative Richard Fisher told Reuters here on Monday that Washington would look at the latest steel data ``very closely'' but that it was too early to comment.

``The numbers have come down, we are still looking at them and are interested to see the disaggregate of those numbers, which we don't have,'' Fisher told reporters after a three-hour meeting with Japanese trade officials.

``It is now a matter of evaluating the numbers.''

Fisher is in Tokyo for a series of meetings on a long list of trade issues from apples and rice to insurance, steel, flat glass and auto parts.

Earlier in the day, however, Fisher said sectoral issues should not mute Washington's broader message that Japan needs to cut thered tape that is strangling growth to help get its economy out of a slump.

``The key thing now is for Japan to lift itself out of the doldrums,'' he told Reuters Television, adding that deregulation and restructuring were what ``saved'' the US economy.

``There will always be bilateral irritants. We are allies, we are friends. We need to resolve these issues and we will.''

Japanese exports overall slipped a meagre 0.6 per cent but imports fell 10.5 per cent in 1998. In December alone, exports fell by 12.2 per cent but imports fell faster, posting a 21.7 per cent drop for the month from December 1997.

``The yen is definitely hurting the export side, but even with the stronger yen, the weakness in the domestic economy is driving imports lower,'' said economist Ron Bevacqua, at Merrill Lynch.

Bank of Japan governor Masaru Hayami told central bank branch managers on Monday that while the pace at which the economy was deteriorating had moderated due to higher public works spending, companies andhouseholds remained cautious and prices were weak.

A finance ministry official said the pace of the rise in Japan's surplus would slow because exports to Asian nations were unlikely to pick up drastically, while import volumes would rise in the medium term as economic stimulus steps boosted demand.

Economists are more sceptical about improving imports but still see the surplus peaking and then staying at high levels.

``In the next few months, the effect of the strong yen should start to hit and we will see it (the surplus) peaking out,'' said economist Brian Rose at Warburg Dillon Read in Tokyo.

Worries that trade friction will flare as the US trade deficit balloons to a record high this year has made currency markets jittery about a possible weakening of the dollar.

But the market reacted little to the topic here on Monday.

``I think the biggest reason for the lack of market reaction is that US treasury secretary Robert Rubin has said he will not use the dollar as a political tool,'' said onedealer.

Many economists say Washington may be reluctant to push trade confrontation too far, given that US consumers and many companies benefit from cheap imports and that a big trade bust-up risks sending the dollar down sharply and upsetting Wall Street.

``I think it would be too destabilising, especially if the US economy is strong. It (trade spats) plays to some quarters politically but it is not going to be the kind of national vote-getter that makes it attractive for any candidate on either side to pursue as a main policy priority,'' Bevacqua said.