Japan's exports rose 23.2% in July from the same month a year earlier, the fastest annual increase since October 2022, driven by booming semiconductor equipment sales and sharply higher trade with China.

The result marked the fifth consecutive month of accelerating export growth and comfortably exceeded the 19.9% rise economists had forecast.

Chipmaking equipment was the single largest driver of the headline figure. By value, Japan shipped 49.1% more semiconductor machinery than a year earlier as companies around the world continued pouring money into hardware for artificial intelligence. Japan occupies a central position in that supply chain: it is home to Tokyo Electron, one of the world's largest makers of chip fabrication tools, and to leading producers of key chipmaking materials such as silicon wafers, so global AI investment flows directly into the country's trade figures.

Trade with China also expanded significantly. Japanese shipments to China grew 25.8% year over year, while exports to the United States rose 22%. China remains Japan's largest trading partner.

AI demand lifts chip exports while the weak yen raises import costs

The gap between export values and volumes was substantial. Export volumes increased just 5.2% in July, meaning higher prices and a weaker yen accounted for much of the gain in shipment value. A soft currency allows Japanese producers to offer lower prices to foreign customers, but the trade-off is that Japan must spend more of its own currency to buy imported goods.

Markets reacted to the July trade figures during the session. The Nikkei 225 climbed 0.64%, while the yen slipped 0.11% against the dollar to trade at 158.35. Japan's currency has weakened sharply over the past year: a dollar bought roughly 145 yen at the same point last year, has recently traded near 160 yen, and changed hands at about 159 yen after Monday's economic data was released. The wide gap between Japanese and US interest rates has been a persistent drag on the yen, and Japanese authorities have stepped into currency markets before to slow its decline, intervening in 2022 and again in 2024 when the currency slid to multi-decade lows.

The import bill also climbed steeply. Imports rose 27.8% in July from a year earlier, the largest annual increase since November 2022 and above the 26.5% gain analysts had predicted.

Oil was a major factor. Japan's petroleum import bill jumped 87.8% as crude prices climbed during the Iran war, forcing businesses and households to absorb higher energy costs. The second quarter was the first full three-month period to capture the economic impact of the conflict, and energy remained expensive throughout, adding to household and business expenses at a time when domestic spending was already losing steam.

Exports sustain growth while weak domestic spending limits second-quarter GDP

Japan's economy expanded at an annualized rate of 1.1% in the second quarter, below economists' estimate of 2%. The previous quarter had shown annualized growth of 2.1%, which also fell short of expectations. Quarter over quarter, growth was just 0.3% against a forecast of 0.5%.

Exports delivered the strongest contribution to GDP, adding 0.5 percentage points in the second quarter, while domestic demand subtracted 0.2 percentage points. A year ago, Japan's economy grew 0.7%, an improvement from the 0.5% annual growth recorded in the first quarter.

The Bank of Japan revised its outlook earlier this month when it published its latest projections for economic activity. The central bank now expects growth of 0.6% for the 2026 fiscal year ending in March 2027, up from its previous estimate of 0.5%. The upgrade came as the bank continues a gradual withdrawal from decades of ultra-loose monetary policy that began when it ended negative interest rates in March 2024, making the growth trajectory a key yardstick for how far that normalization proceeds.

Prime Minister Sanae Takaichi has stated her intention to return the economy to a solid growth track. Her approval ratings currently remain higher than those of some previous Japanese prime ministers, though they have been gradually declining. With external demand doing most of the work and domestic spending holding the economy back, upcoming wage, consumption and trade data will show whether Japan's recovery can broaden beyond its exporters.

Source: CNBC