China's strong demand drives Japan's exports up 11.7% in March.

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The recovery of Chinese demand and rising global prices have jointly driven Japan’s exports to expand for the seventh consecutive month, but energy risks caused by Middle Eastern conflicts are gradually permeating the supply chain, casting a shadow over this strong momentum.

Data released by Japan’s Ministry of Finance on Wednesday showed that the total value of exports in March increased by 11.7% year-on-year, exceeding the market’s median forecast of 11%, and accelerating significantly from the revised growth rate of 4% in February.

Among them, exports to China grew by 17.7% year-on-year, becoming the main growth engine for the month, with chips, electronic components, and non-ferrous metals leading the way. Exports to the US increased by 3.4%, marking the first positive growth in four months.

Meanwhile, imports grew by 10.9% year-on-year, higher than the market expectation of 7.1%. Japan’s trade surplus in March narrowed to 667 billion yen (about $4.2 billion), lower than the market expectation of 1.1 trillion yen.

Takeshi Minami, Chief Economist at Norinchukin Research Institute, said that the Iran war had not caused a negative impact on oil imports in March, as many tankers had already been en route to Japan when the war broke out, and crude oil continued to arrive at Japanese ports in the first half of March. The full impact of the Middle Eastern conflict is expected to be reflected in April’s data.

Chinese Demand Recovery Becomes the Highlight for Exports

China was the most prominent positive factor in Japan’s March export data. As the disruption from the Lunar New Year holidays faded, exports to China jumped 17.7% year-on-year, with shipments of chips, electronic components, and non-ferrous metals seeing significant increases.

According to Bloomberg, China’s post-holiday resumption of work and steady economic growth in the first quarter benefited several trade partners in the region. South Korea’s export growth remained strong at the beginning of April, with shipments to China surging 70.9%; in March, South Korean exports to China also climbed 64.2%, as surging global demand for AI chips outweighed supply chain uncertainties arising from the Middle East situation.

Exports to the US Turn Positive for the First Time in Four Months, Automakers Absorb Tariff Costs Under Pressure

Exports to the US increased by 3.4% year-on-year in March, ending a four-month decline. This rebound is related to a US-Japan trade agreement reached last year—in exchange for Japan’s commitment to expand US investment, the US agreed to maintain relatively low tariff rates on Japanese goods.

Notably, Japanese automobile exports to the US, calculated by value, fell by 1.6%, but increased by 2.3% in terms of quantity, indicating that Japanese car manufacturers are proactively compressing profits to absorb tariff costs and maintain market share. Battery shipments surged nearly 57%, becoming the fastest-growing category among exports to the US.

Middle Eastern Conflict Impact Yet to Appear, April Data May Be Key

Although Iran’s blockade of the Strait of Hormuz has disrupted Gulf energy transport and impacted global supply chains, this effect is not fully reflected in March’s data. Data shows that crude oil imports increased in volume, but fell by 7.3% in value.

Takeshi Minami pointed out that April’s data will be a key window for observing the substantive impact of the Middle Eastern conflict. Meanwhile, shortages of petrochemical raw materials such as naphtha have forced dozens of companies to announce order suspensions recently, despite the Japanese government’s assurance of sufficient inventories. Japan’s Ministry of Trade also stated that it can secure crude oil supply for the year by seeking alternative sources outside the Strait of Hormuz and using oil reserves.

Yen Weakness Intensifies Inflation Pressure, BOJ Faces Policy Dilemma

Rising energy prices and continued yen weakness together are increasing Japan’s inflation risk. Ministry of Finance data shows that the average yen-to-dollar exchange rate in March was 156.60, down 4.7% from a year earlier, further raising import costs.

The Bank of Japan is inclined to maintain the interest rate at its April 28 policy meeting. Analysts point out that rising inflation risks should prompt a rate hike, but surging energy costs also suppress economic growth, making monetary policy choices difficult. Takeshi Minami said: "Exports remain strong. Although the Iran war has already broken out, I believe that until around mid-March, the assessment that the global economy is still on the path to recovery basically holds."

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