17%! Japan's May export growth hits a three-year high, chip exports surge 62%

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Japan's exports rebounded strongly, but hidden concerns lurk beneath the surface prosperity.

According to the latest data released by the Japanese government on Wednesday, exports in May increased by 17% year-on-year, marking the fastest growth since November 2022, exceeding economists' expectations from a Reuters survey of 16.2%, and accelerating significantly from April’s 14.8%. Semiconductor exports surged by 61.2% driven by exploding demand for artificial intelligence, becoming the main engine of this round of export growth.

However, according to Reuters, economist Koki Akimoto from Daiwa Institute of Research pointed out that price effects—including the depreciation of the yen and rising energy costs—were major factors behind the rise in nominal export values, while exports calculated by volume only increased by 0.5%.

"Overall export volume barely increased, showing a lack of intrinsic momentum," he said. Meanwhile, supply chain disruptions in the Middle East triggered by the US-Iran war caused severe shocks to Japan's oil imports and dragged down exports to the Middle East significantly.

Chips and Cars Drive Growth, Exports to China and US Improve Together

May's export growth showed clear structural characteristics, with semiconductors and automobiles as two central pillars.

Official data shows exports of semiconductors and other electronic components surged 61.2% year-on-year, benefiting from global AI-driven demand for data center construction, and prices of memory chips and non-ferrous metals climbed sharply. Automobile exports grew by 16.4% year-on-year, also showing strong performance.

By destination, exports to China grew by 17.9% year-on-year, while exports to the US rose by 12.5%. China is Japan’s largest trading partner, with the US in second position. This simultaneous expansion in two major markets provided solid support for overall exports.

In contrast, exports to the Middle East were visibly impacted by the US-Iran war, dropping by 32% year-on-year.

Price Effects Mask Weak Volume Growth, Trade Deficit Narrows but Structure Remains Concerning

Despite the impressive nominal export growth, export volume only increased by 0.5%, revealing a structural weakness behind the data.

Akimoto stated that the weak yen and rising energy costs were major drivers pushing the nominal values of both exports and imports higher, with real improvements in trade volume being quite limited. "Over time, supply disruptions that drive up oil prices tend to worsen trade conditions and suppress global demand, ultimately weighing on export prospects," he added.

On the import side, imports in May grew by 12.5% year-on-year, the fastest pace since January 2025, but slightly below market expectations of 12.8%. Oil imports shrank sharply due to the blockade of the Strait of Hormuz—crude oil import volume plummeted by 57.3% year-on-year, and its value dropped by 28.5%, but the cost per unit (in yen terms) reached a historic high. The Japanese government has begun diversifying crude oil sources, including expanding imports from the United States (up 24% year-on-year), but has not fully compensated for the Middle East supply shortfall (Middle East crude oil imports fell 61.9% year-on-year).

Overall, the trade deficit for May was 378.7 billion yen (about $2.36 billion), better than the expected deficit of 564.6 billion yen.

BOJ Rate Hike Settled, Strong Data Still Mask Policy Dilemma

On the same day as the trade data release, the Bank of Japan announced a 25-basis-point hike in policy rate to 1%, the highest level in over 30 years, citing persistent inflation and continued yen weakness.

The yen's depreciation helps boost nominal export values in the short term, but it also exacerbates import inflation, weakens household purchasing power, and creates a policy dilemma. Market reactions to the data were muted. After the data release, Japan's benchmark Nikkei 225 index fell 0.5%, and the yen/dollar exchange rate was almost unchanged at 160.4.

According to the Reuters Tankan survey, in June, the confidence index of large manufacturers rose to +13, the highest in three months, up from +8 in May; the non-manufacturing index rose to +32. A positive reading means optimists outnumber pessimists, and is one of the key leading indicators closely watched by the BOJ. In addition, core machinery orders in April rose 8.7% month-on-month, far exceeding market expectations of 0.9%, indicating a possible recovery in corporate investment appetite.

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