Japan's exports rose 19.3% in August, but high oil prices pushed up the trade deficit.

Japan's exports continued to grow by double digits in August, with shipments to the US and China both outpacing the overall market. However, import costs rose rapidly due to rising oil prices and a weak yen, widening the trade deficit to 1.1 trillion yen, marking the fourth consecutive month of deficit. Strong momentum in semiconductor exports is offsetting the price shocks from energy imports.

Data released by Japan's Ministry of Finance on Wednesday showed that exports rose 19.3% year-on-year in August, marking the 12th consecutive month of growth, but slowing from 23.2% in July and exceeding the median forecast of 18.4% by economists. Imports surged 28% year-on-year, far outpacing export growth, pushing the unadjusted trade deficit to 1.1 trillion yen from a revised 638.3 billion yen in July.

Exports of electronic components such as semiconductors surged 52% year-on-year, becoming the core engine of overall growth; exports to the US increased by 24.9%, exports to China by 20.6%, and exports to Europe by 11%. However, these high growth rates were still insufficient to offset the rise in energy import costs—oil imports in August increased by approximately 59% in value, while import volume increased only slightly by 3.6%, with price factors contributing almost all of the increase.

Atsushi Takeda, chief economist at the Itochu Institute, pointed out that high oil prices are pushing up import costs and widening the trade deficit. As crude oil prices break through $100 per barrel, the trade deficit will continue to widen, and it will become increasingly difficult to return to a surplus.

Semiconductor exports surged 52%, with shipments to the US leading the pack.

Electronic components, particularly semiconductors, were the core driver of export growth in August. Exports of electronic components rose 52% year-on-year, with semiconductor exports to China more than doubling and semiconductor manufacturing equipment exports to the US and EU increasing by over 100%. While automobile exports continued to grow, the pace of growth slowed compared to previous months.

In terms of destination, exports to the US increased by 24.9%, exports to China increased by 20.6%, and exports to Europe increased by 11%, with demand in major markets remaining stable.

Oil prices break $100, trade deficit widens for the fourth consecutive month

The direct driver of the widening trade deficit in August was energy imports. Oil imports increased by approximately 59% in value that month, while the volume of imports rose only slightly by 3.6%. The average price of Brent crude oil in August was around $88 per barrel, still relatively high; however, entering September, influenced by the escalating attack in the Strait of Hormuz and the ongoing US-Iran standoff, Brent crude oil prices broke through $100 per barrel last week.

Japan is accelerating the diversification of its crude oil sourcing. In August, Japan's crude oil imports from the United States increased by more than 1,000% to 400 billion yen; imports from the Middle East increased by only 3.7% in value, while the volume declined by about 31%. U.S. Interior Secretary Doug Burgum stated earlier this week that an export ban would only be considered if he believed it would truly lower domestic oil prices, but this has not been the case.

The yen shifted from weakness to appreciation, highlighting the struggle between import costs and export competitiveness.

Data from the Ministry of Finance shows that the average exchange rate of the yen against the US dollar in August was 160.64, a depreciation of 8.7% compared to the same period last year. A weaker yen increases the cost of imported raw materials denominated in yen, while simultaneously providing exporters with price competitiveness overseas.

However, the yen's performance has reversed since September: by the end of September, the yen had appreciated by more than 3% against the dollar, becoming the best-performing Asian currency during that period. On Wednesday morning in Tokyo, the yen was trading around 155.18 against the dollar, still well below its 10-year average of 126.55.

Takeda believes that demand for AI-related products is expected to remain strong, which will support exports.

We will continue to monitor whether oil prices can remain above $100 and whether the appreciation of the yen can alleviate the pressure on import costs denominated in yen.

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