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Japan’s Export Decline Exceeds Forecasts

Japan’s exports fell 2.6% in July compared with a year earlier, marking the steepest drop since February 2021. The contraction was worse than the 2.1% decline expected in a Reuters poll and followed a milder 0.5% fall in June, highlighting rising pressure on the world’s fourth-largest economy.

Imports also contracted, slipping 7.5% year-on-year, but the drop was smaller than the 10.4% decline economists had forecast.

The trade data underscores how Japan’s external sector — traditionally a key driver of growth — is struggling amid global demand weakness, U.S. tariff policies, and persistent challenges in its biggest markets.

Weak Demand from the U.S. and China

The United States, Japan’s largest export market, saw a 10.1% decline in shipments from Japan in July, following an 11.4% drop in June. A particularly sharp fall came from autos, with exports of cars, buses, and trucks plunging 28.4% year-on-year in July, compared with a 26.7% slump in June. Automobiles remain Japan’s largest export category to the U.S., making the decline especially significant.

Shipments to mainland China, Japan’s second-largest trading partner, fell 3.5%, reflecting subdued demand. However, exports to Hong Kong surged 17.7%, providing a rare bright spot in Asia.

Tariff Pressures and Auto Industry Setbacks

The sharp drop in auto exports comes against the backdrop of changing tariff structures. On July 22, Japan reached a trade deal with Washington, lowering the so-called “reciprocal tariff” on Japanese automobiles from 25% to 15%, down from the higher rate threatened by U.S. President Donald Trump earlier that month.

Although the new 15% tariff will only be reflected in August trade figures, analysts warn it could further weigh on export competitiveness. Autos remain the backbone of Japan’s export economy, and any prolonged weakness could ripple across manufacturing and supply chains.

The decline in auto shipments also followed disruptions earlier in the year. In March, an explosion at a key supplier in central Japan temporarily halted production at Toyota Motor, the world’s largest carmaker. This bottleneck led to a catch-up in shipments during April–June, but the rebound appears to have been short-lived, with July figures showing renewed weakness.

Market Reactions and Currency Moves

The release of the weak trade data had immediate market effects. The Nikkei 225 fell 0.9%, while the yen weakened to 147.79 per U.S. dollar, signaling investor concerns over the durability of Japan’s growth momentum.

This comes despite Japan’s second-quarter GDP exceeding expectations, with the economy expanding 0.3% quarter-on-quarter and 1.2% year-on-year, largely driven by net exports. Analysts now fear that a sustained export slump could reverse that momentum.

Analysts Warn of Recession Risks

Economists are increasingly cautious about the outlook. Masato Koike, senior economist at Sompo Institute Plus, warned that Japan faces the possibility of slipping into a technical recession, depending on the scale of the impact from U.S. tariffs.

Similarly, Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, noted that while recent data showed resilience due to a catch-up in auto shipments, structural risks remain. If tariffs drag on demand and consumer preferences continue shifting, Japan could struggle to maintain stability in its external sector.

Outlook

With exports showing their steepest decline in more than four years and tariffs on automobiles set to weigh further on trade in the coming months, Japan’s outlook remains fragile. The balance between recovering domestic demand and external headwinds will be crucial in determining whether the economy sustains growth or slips toward recession.

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