Preliminary Finance Ministry data on Thursday showed that Japan was running a trade deficit of 634.5 billion yen ($4 billion) in July, the country’s third-straight monthly deficit, after exports rose at an equally strong pace as record-high imports. The shortfall was less than the 680 billion yen range of the market forecast.
Exports jumped 23.2 per cent from a year ago to 11.5 trillion yen, beating an economist estimate of 19.9 per cent. Imports rose 27.8% to 12.1 trillion yen, again exceeding forecasts and a new record level for the second month in a row. Reuters reported that both sides of Japan’s trade balance were supported by strong global demand but affected by higher energy costs.
The difference in the growth rates, 4.6 percentage points, was sufficiently large to keep the trade balance in the red in Japan despite the best export performance in the data.
Higher Energy Costs Lift Import Bill
Energy costs were a major factor behind the increase in imports. The value of crude oil imports rose 87.8% in July, while crude import volumes increased 5.5% from a year earlier, according to the trade data reported by Reuters.
Japan has increased purchases from alternative suppliers as disruptions to Middle Eastern energy flows have affected shipping routes. Reuters reported that U.S. crude has become an important alternative source as Japanese importers adjust to changes in regional supply.
“The recovery in crude volumes, combined with persistently high oil prices and larger shipments of pricier U.S. crude, has been pushing up the value of imports,” said Koki Akimoto, an economist at the Daiwa Institute of Research.
The higher import bill also reflects the impact of the weaker yen. A weaker Japanese currency can raise the yen-denominated cost of commodities priced in dollars, including crude oil.
Japan’s energy import structure has also been affected by disruptions in Middle Eastern shipping. Data compiled by the Japan External Trade Organization show that Japanese importers have been diversifying crude supplies as shipments from traditional Middle Eastern sources have been disrupted.
Semiconductor Demand Drives Exports
Japan’s export growth remained broad-based, with semiconductor-related products and automobiles among the main contributors.
Demand for electronics-related shipments remained robust, with semiconductors growing 49% in July. Shipments to the United States jumped 22% from a year ago, and to China up 25.8%.
The weaker yen has also helped Japan’s exports become more competitive. The export growth was the 11th month in a row to beat the previous year’s level, according to the Finance Ministry data.
The strength of semiconductor-related exports is significant because Japan remains an important supplier of electronic components and manufacturing equipment used across global technology supply chains.
Trade Data Add to Mixed Economic Picture
The trade data follows Japanese growth in the April-June quarter that was lower than expected.
The Japanese economy grew 1.1% a year on a year on year basis in the second quarter, from 1.9% in the first quarter, and below the 2% projected by a Reuters poll. The slowdown in household spending and investment, and support from exports, led to a decline in overall growth.
The combination of strong exports and weak domestic demand leaves Japan’s economy facing different pressures. External demand, particularly for technology products and automobiles, has remained resilient, while higher import costs continue to weigh on households and businesses.
Wholesale inflation is another factor policymakers are monitoring. Producer prices rose 7.2% in July from a year earlier, according to Reuters, adding to concerns that higher energy and import costs could continue to feed through the economy.
Bank of Japan Policy in Focus
The trade data could add to debate over the timing of further Bank of Japan interest-rate increases, although the latest figures do not establish that a rate increase will occur at the central bank’s next meeting.
The Bank of Japan currently guides the uncollateralized overnight call rate at around 1%, following its June policy decision. Its next monetary policy meeting is scheduled for Sept. 17-18.
The wholesale inflation and resilient exports could support the case for continued monetary-policy normalization, with some economists expecting a rate increase as early as September.
“With chip-related demand still running hot and exports to all three of Japan’s major trading partners accelerating, the July data points to a manufacturing and technology sector that continues to outperform,” Reuters reported, citing trade analysts.
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