Japan's July Exports Record Biggest Drop in Four Years; Exports to the US Decline for Fourth Consecutive Month

TradingKey - On Wednesday, August 20, Japan's Ministry of Finance released trade data showing that July exports fell by a larger-than-expected 2.6% year-on-year, marking the steepest decline since February 2021. Notably, exports to the US fell for the fourth consecutive month with a 10.1% year-on-year decrease, highlighting the ongoing impact of tariffs.

Exports of automobiles and parts to the US dropped by 28.4% and 17.4% respectively, although the volume of car exports only fell by 3.2%. Japanese economist Takeshi Minami noted that Japanese exporters have striven to avoid significant price hikes, thus maintaining shipment volumes. However, he warned that ultimately exporters will need to pass on costs to US consumers, which could affect sales in the coming months.

In April, the US raised tariffs on Japanese automobiles and parts from 2.5% to 25%. Although a trade agreement reached on July 23 between the two nations aimed to reduce tariffs to 15%, the policy has yet to take effect and continues to impact Japanese businesses.

Besides automobiles and parts, exports of semiconductor manufacturing equipment to the US also saw a significant decline of 31.3%, indicating that the US tariff policy is increasingly affecting the export of high-tech Japanese products.

Analysts pointed out that Japan's exports to the US remained under pressure in July. Although the 10.1% decline is an improvement over June's 11.4% drop, it remains substantial. Given that the US is Japan's largest export market, this weak performance will directly affect Japan's overall trade situation.

The Ministry of Finance reported that due to decreased exports of automobiles, steel, and other products, Japan's trade deficit in July was 117.5 billion yen, marking the third deficit in four months.

Economists warn of the possibility of a recession in the Japanese economy. While Japan's economy performed better than expected in the second quarter, with GDP growing 0.3% quarter-on-quarter and 1.2% year-on-year, growth has been largely driven by external demand rather than domestic consumption. Continued declines in exports could impact growth prospects and heighten market concerns.

The weak export data is expected to influence the Bank of Japan's monetary policy decisions. The market anticipates a more cautious stance from the Bank, likely maintaining the current policy at the September 19 meeting. Continued declines in exports could further reinforce this tendency. Raising interest rates would lead to a stronger yen, which could further dampen Japan's export performance. Given Japan's export dependency, this could potentially lead to an economic downturn.