Japan Exports Extend Growth Streak on Strong AI Demand
Japan’s exports increased for a seventh consecutive month in March, supported primarily by rising demand linked to artificial intelligence. According to official government data released on Wednesday, this strong AI-driven momentum has so far helped cushion the impact of trade disruptions stemming from the Middle East conflict.
Koki Akimoto, economist at Daiwa Institute of Research, noted that global demand for AI infrastructure—particularly data centres—continues to drive Japan’s trade performance. However, he cautioned that while AI demand is expected to remain resilient, geopolitical tensions could weigh on the outlook, leaving growth relatively flat in the near term.
Trade Data Beats Expectations but Signals Mixed Trends
Japan’s total exports rose by 11.7% year-on-year in March, exceeding market expectations of an 11% increase. Imports also climbed sharply, rising 10.9% compared to forecasts of 7.1%, as the full effects of oil supply disruptions—triggered by the effective closure of the Strait of Hormuz—have yet to be fully reflected.
Despite the strong trade activity, Japan recorded a trade surplus of 667 billion yen ($4.18 billion), falling short of expectations for a 1.1 trillion yen surplus.
Middle East Conflict Begins to Impact Trade Flows
Beneath the headline growth, signs of strain linked to the Middle East conflict are becoming increasingly visible. Exports to the region dropped sharply by 45.9% compared to a year earlier, largely due to a 36.8% decline in automobile shipments.
This weakness was partially offset by stronger demand from other key markets. Exports to the United States rose by 3.4%, while shipments to China surged by 17.7%, helping to stabilize overall export performance.
Economic Outlook Remains Uneven Amid External Pressures
Japan’s economy continues to show signs of moderate recovery, supported by steady business investment and resilient export activity. However, growth remains uneven as external risks continue to cloud the outlook.
Rising oil prices pose a significant threat, as higher energy costs increase import expenses and put pressure on household purchasing power in an economy heavily dependent on energy imports.
Energy Costs and Supply Risks Weigh on Manufacturers
Manufacturers are becoming increasingly concerned about the impact of rising energy prices and supply disruptions. Shortages of key inputs such as naphtha—a critical petrochemical feedstock—have already forced some companies to scale back production in recent weeks, despite government assurances regarding sufficient reserves.
Akimoto warned that prolonged uncertainty in the Middle East could also dampen global capital investment. This, in turn, may reduce demand for Japanese capital goods exports, adding further pressure on the country’s trade outlook.
Bank of Japan Policy Outlook in Focus
The Bank of Japan is widely expected to keep interest rates unchanged at its upcoming policy meeting next week. However, it is likely to maintain a tightening bias as a weaker yen and rising energy costs continue to fuel inflationary pressures.
This creates a challenging balancing act for policymakers, who must navigate between controlling inflation and supporting economic growth.
