40 years of low yen levels propelled export surge: Japan's July export figures far exceeded expectations, with AI chip demand countering the shadow of the Middle East conflict.

Notably, driven by strong demand for chips and cars as well as the yen's drop to a 40-year low, Japan's export growth accelerated to its fastest rate since 2022. Data published by the Ministry of Finance on Thursday showed that exports in July rose 23.2% year-on-year, further increasing from June's growth rate of 19.3%. This result exceeded the median forecast of 20.1% by economists and marked the fastest growth since October 2022. Imports grew by 27.8%, faster than the previous months increase of 25.4% and also above economists' expectations of 25.1%. On an unadjusted basis, the trade deficit widened from a revised 409.9 billion yen in June to 634.5 billion yen, marking a deficit for the third consecutive month. Japan's export growth hits its fastest rate since 2022. The data indicates that, so far, Japanese manufacturing has largely managed to cope with the impact of the Middle Eastern conflict. For the three months ending in June, the weak domestic demand led to economic growth falling short of expectations, making this data an encouraging signal for the Japanese economy. Yuki Ito, an economist at Nomura Securities, stated, Due to the recent AI boom, exports of semiconductor manufacturing equipment and semiconductor components are increasing. He noted a rise in chemical product exports as well, adding, I speculate that part of the reason is that the supply constraints on naphtha have been somewhat alleviated, allowing exports that have been declining to finally see a rebound. The weak yen has increased shipment amounts and has become one of the factors supporting corporate growth by enhancing the competitiveness of Japanese products in overseas markets. This currency hit a 40-year low against the dollar in July. The Ministry of Finance reported that the average exchange rate of the yen against the dollar was 161.83, representing a depreciation of 11.2%. Robust global demand for AI chips is one of the core drivers of this growth. Exports of electronic components, including semiconductors, grew by about 49%. Other areas of growth included exports of passenger cars, which rose by 21%. By destination, shipments to the United States increased by 22%, while shipments to China and Europe grew by 25.8% and 19.1%, respectively. Meanwhile, the conflict continues to alter Japan's energy procurement patterns after the war in Iran effectively closed the Strait of Hormuz. Trade reports indicate that total oil imports surged nearly 88%, with import volumes increasing by 5.5%. In terms of import share, the proportion from the U.S. rose from 7% in February to 36% of the total, while the proportion from the Middle East fell to 59%. The 60-day negotiation window set under the U.S.-Iran understanding memorandum expired on Monday without reaching a permanent peace agreement, and uncertainty surrounding this conflict persists. The temporary agreement aimed to resolve disputes related to the Strait of Hormuz, Iran's nuclear program, and economic sanctions but failed to produce a lasting solution. Economist Yuki Ito remarked, From shipping data, Japan seems to continue making progress in securing alternative supplies from the U.S.