Koji Kakigi, chairman of the Japan Iron and Steel Federation, said he fears the escalating Sino-U.S. trade war could crimp development of the Chinese economy, potentially sapping local demand for steel and pushing more of the commodity into export markets.

His comments come as China's steel exports rose 2 percent in June from a year earlier, marking an 11-month high and their first year-on-year increase in 23 months, buoyed by strong international prices and a weaker yuan.

"We need to closely observe the rising exports from China," Kakigi told a news conference on Tuesday.

"Our biggest worry is a scenario that the U.S.-China trade war would dent China's economy and steel demand, leading to a surge in China's steel exports," he said.

U.S. President Donald Trump on Friday said he was ready to impose tariffs on all $500 billion of imported goods from China, threatening to deepen a clash over trade policy that has unnerved financial markets.

The Japanese steel industry is also concerned over a demand-hit from the potential imposition of broad U.S. tariffs on the automotive sector as it would impact their auto and auto parts customers, Kakigi said.

In May, Trump also ordered a national security probe into imports of autos and said in late June that the investigation would wrap up in three to four weeks, Reuters reported. Similar national security probes have led to import tariffs on steel and aluminium.

"We strongly hope that the U.S. tariffs would not spread to the auto sector," Kakigi said, calling for Japanese government to do all it can to prevent such a move.

Kakigi, who is also president of JFE Steel, a unit of JFE Holdings, said its U.S. customers have continued to buy its products even after the imposition of 25-percent import tariffs on steel in March.

Meanwhile, China began an anti-dumping investigation on Monday into stainless steel imports worth $1.3 billion, including from a privately owned Chinese mill with operations offshore and Japanese mills such as JFE Steel, after complaints of damage to the local industry.

Kakigi said that as president of JFE Steel he did not consider stainless steel exported to China by the company to be an appropriate target for an anti-dumping probe.

(Reporting by Yuka Obayashi; Editing by Christian Schmollinger and Joseph Radford)

By Yuka Obayashi