Japan's exports extended their impressive growth streak for the ninth consecutive month in May, with exports rising 17% year-on-year - the fastest pace since November 2022 - according to government data reported by Reuters. This performance significantly beat market expectations of a 16.2% rise and accelerated from April's 14.8% growth. However, export volumes grew by just 0.5%, indicating that much of the increase was driven by price effects rather than stronger underlying demand. As economist Koki Akimoto from Daiwa Institute of Research noted, "With the overall volume hardly increasing, exports lacked underlying strength."
The surge in exports was largely led by electronic components, with semiconductor exports jumping 61.2% in value terms as sustained global investment in artificial intelligence infrastructure and data centres drove demand for chip-making equipment and electronic components. Car exports also contributed significantly, rising 16.4% on the year. By destination, China remained Japan's largest trading partner with a 17.9% increase in shipments, while exports to the United States, the second-largest market, rose 12.5%. As reported by Reuters, electronic components, especially for AI applications, led the surge in export values. The global artificial intelligence boom has cushioned parts of the world economy against war-driven risks, enabling import-dependent nations like Japan to absorb immediate shock to growth and trade.
Exports to the Middle East fell 32% as the US-Iran war disrupted trade routes and reduced activity across the region. However, crude oil import values plunged 28.5% despite Japan's heavy reliance on imported fuel, as the closure of the Strait of Hormuz sharply curtailed volumes while simultaneously driving prices higher. Japan's crude oil imports fell sharply, dropping 28.5% in value terms and 57.3% by volume, while the cost per unit of imported crude in yen terms reached a record high. However, crude oil imports from the Middle East tumbled 61.9% in volume terms last month, while those from the United States rose 24%, reflecting the government's efforts to diversify procurement. U.S. and Iranian officials said on Sunday they had agreed on a framework for a deal to end their war, halt the U.S. blockade of Iran and reopen the Strait of Hormuz.
Despite the rise in trade activity, Japan recorded a trade deficit of 378.7 billion yen ($2.36 billion) in May, which was considerably smaller than economists' expectations of 564.6 billion yen, reflecting stronger-than-anticipated export performance. The sharper-than-forecast narrowing in the trade deficit will offer modest yen support at the margin, though the currency remained little changed following the release. A potential reopening of Hormuz under the US-Iran framework agreed in principle over the weekend could further ease import costs in coming months, which would further compress the deficit. Imports grew 12.5% in May from a year earlier, compared with market forecasts for a 12.8% increase, with the gains coming despite the plunge in crude oil import volumes.
Separate data released on Wednesday showed Japan's core machinery orders increased 8.7% in April from the previous month, significantly outperforming forecasts of a 0.9% increase. As reported by Reuters, the stronger reading could indicate a gradual recovery in corporate investment spending. The data lands a day after the Bank of Japan raised its policy rate by 25 basis points to 1.0%, the highest level in over three decades, with the Nikkei down 0.5% and the yen little changed at 160.4 per dollar after the release. Economist Koki Akimoto warned that "higher oil prices driven by supply disruptions tend to erode Japan's net exports over time, as worsening terms of trade and softer global demand combine to weigh on the export outlook."
