Japan exports jump 17% in May, fastest pace in 3 years

Japan's exports grew 17% in May, the fastest annual pace since November 2022, powered by a surge in semiconductor shipments.

Japan's exports rose 17% in May from a year earlier, the fastest pace since November 2022, as booming demand for semiconductors and cars offset disruptions from the Middle East conflict.

"Strong chip exports are providing a crucial buffer for Japan's trade sector, even as energy costs surge from the Strait of Hormuz closure," said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.

Exports of semiconductors surged 61.2% in value terms, while car shipments jumped 16.4%, finance ministry data showed Wednesday. Shipments to China, Japan's largest trading partner, rose 17.9%, and exports to the U.S. gained 12.5%. Exports to the Middle East fell 32% as the U.S.-Iran war disrupted trade routes.

The data shows the resilience of Japan's export-driven economy even as the Bank of Japan raised its policy rate to 1% on Tuesday, the highest in 31 years, to combat imported inflation from a weak yen and higher energy costs. The trade deficit narrowed to 378.7 billion yen ($2.36 billion), better than the 564.6 billion yen forecast.

Imports rose 12.5% year on year, the highest since January 2025, though slightly below the 12.8% consensus estimate. Crude oil import volumes plunged 28.5% in value terms as the closure of the Strait of Hormuz sharply raised prices for Japan, which sources about 90% of its crude from the Middle East.

The yen traded at 160.4 against the dollar, little changed after the data release, as Japan's currency continues to languish near historic lows despite the finance ministry spending 11.7 trillion yen on intervention efforts. A weak yen boosts export competitiveness but pushes up import costs, squeezing households and small businesses.

BOJ's Rate Dilemma

The Bank of Japan's quarter-point rate hike on Tuesday came as U.S. Treasury Secretary Scott Bessent urged Tokyo to allow independent monetary policy, free from political pressure to keep rates low. Prime Minister Sanae Takaichi, a proponent of loose policy and a weak yen, has faced mounting pressure as inflation expectations rise.

The Reuters Tankan survey showed business sentiment among large manufacturers climbed to +13 in June, the highest in three months, from +8 in May, signaling that exporters remain optimistic despite geopolitical headwinds. The non-manufacturing index rose to +32.

What Comes Next

U.S. and Iranian officials said Sunday they had agreed on a framework to end their war and reopen the Strait of Hormuz, which could ease energy supply disruptions. Still, economists expect war-related price pressures to persist through year-end, keeping the BOJ on a tightening path. Markets now price a higher probability of another rate increase before year-end as the central bank seeks to normalize policy after decades of ultra-low rates.

Japan's economy grew 0.5% sequentially in the first quarter and 1.8% on an annualized basis, with exports remaining a primary growth driver. The sustainability of that momentum depends on whether global chip demand holds and whether Middle East supply routes stabilize.

This article is for informational purposes only and does not constitute investment advice.