Japan's May trade data showed exports surging at the fastest pace in more than three years, but a widening deficit highlighted the cost of energy supply diversification after the Strait of Hormuz closure.
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Japan exports jump 17% in May as weak yen, AI chip demand fuel growth
Japan's May trade data showed exports surging at the fastest pace in more than three years, but a widening deficit highlighted the cost of energy supply diversification after the Strait of Hormuz closure.
Japan's exports rose 17% in May from a year earlier, the fastest pace since November 2022, beating the 16.2% consensus estimate, as a weak yen and surging AI-related chip demand boosted outbound shipments to 9.51 trillion yen ($59.4 billion).
"The export numbers reflect strong tailwinds from yen depreciation and the global AI investment cycle, but the headline masks a deterioration in trade volumes," said Norihiro Yamaguchi, economist at Oxford Economics. "Higher energy prices are likely to weigh on the global economy and dampen demand for Japanese products, particularly capital goods not related to artificial intelligence."
Imports climbed 12.5% year on year to 9.89 trillion yen ($61.8 billion), outpacing the 12.8% forecast and leaving a trade deficit of 378.6 billion yen ($2.4 billion) — the first shortfall in four months. Electrical machinery imports jumped 31.5% as the artificial intelligence boom drove demand for computer chips and components. Overall oil imports fell 28.5% in value and plunged 57.3% in volume, but those from the U.S. surged 663.4%, reflecting Japan's pivot toward alternative supplies after the closure of the Strait of Hormuz in late February. About a fifth of the world's oil had passed through the strait before the U.S. and Israel began military operations against Iran.
The data shows the dual challenge facing Japan's economy: export-led growth sustained by a yen trading near 160 against the dollar, and an energy shock driving up import costs and squeezing the trade balance. The Bank of Japan raised its policy rate to 1% on Tuesday, the highest since 1995, citing persistent inflation risks. Prime Minister Sanae Takaichi has said Japan has sufficient crude supplies through non-Middle Eastern channels until March 2028, but BOJ Deputy Gov. Shinichi Uchida cautioned that structural uncertainties remain over how quickly supply chains can fully recover.
The weak yen has been a double-edged sword for the world's fourth-largest economy. While it boosts the value of exports — Japan shipped fewer vehicles in May but the value of those shipments rose more than 13% — it also pushes up imported inflation and erodes household purchasing power. The yen traded at 160.4 against the dollar Wednesday, little moved even after the Finance Ministry deployed 11.7 trillion yen to defend the currency. A year ago, the yen was at 140 levels.
The Reuters Tankan survey, closely watched by the central bank, showed business sentiment among large manufacturers climbed to plus 13 in June, the highest in three months, from plus 8 in May. The non-manufacturing index rose to plus 32, suggesting the services sector remains resilient despite higher input costs.
Yasuhisa Irie, an economist at Mizuho Securities, said energy prices will likely stay elevated for now, driving a temporary surge in Japan's imports during the latter half of 2026. "Given that the restoration of oil infrastructure might take time," he said, the import bill will remain under pressure even after an interim peace deal between the U.S. and Iran raised hopes for a resolution to the conflict.
The BOJ's rate increase to 1% — the first time since 1995 that the benchmark has been at that level — has so far failed to stem the yen's decline. The currency's weakness has become a political concern as it amplifies the cost of imported food and fuel for households. Japan's core consumer inflation has remained above the central bank's 2% target for more than three years, giving policymakers cover to continue tightening even as the economy faces external headwinds.
Japan's economy grew 0.5% sequentially in the first quarter and 1.8% on an annualized basis, but the outlook is clouded by the energy shock. Oxford Economics' Yamaguchi said he expects export momentum to ease gradually as higher energy costs dampen global demand.
This article is for informational purposes only and does not constitute investment advice.
[1] Japan Imports Rise as Energy Supply Diversification Progresses - WSJ[2] Japan exports in May grow at fastest pace in more than three years, beating estimates - CNBC[3] Japan May exports grow at fastest pace in over three years, beating estimates, as chip demand soars[4] Japan’s exports jump 17% in May, but logs a deficit as imports surge[5] Japan's exports rise on weak yen, AI boom, but price-led gains mask weak volumes
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