Confidence amongst Japan's top manufacturers slips in June

A weak yen boosts exports, but sales volume has decreased for the fourth consecutive quarter.

Confidence among Japan's big manufacturers fell in June, highlighting an uneven post-COVID recovery, analysts say.

Capital Economics predicts that Japan's GDP growth in the second quarter will be negatively impacted by net trade, estimating a modest 0.2% quarter-on-quarter growth following a 0.5% contraction in the previous quarter. Net trade, the difference in value between exports and imports, remains a critical factor.

Japan's weak yen significantly increased the value of exports in May, but sales volume decreased for the fourth consecutive month, indicating that global demand is still relatively soft and complicating the central bank's monetary tightening path. The Ministry of Finance reported that Japan's shipments climbed 13.5% year-on-year in value terms in May, boosted by US-bound shipments of cars and China-bound chip-making machinery. However, export volumes plummeted 0.9% year-on-year, suggesting tepid global demand.

Imports in May grew 9.5%, slightly below the expected 10.4% increase, and down from 8.3% in April, leading to a trade deficit of 1.22 trillion yen, smaller than the anticipated 1.31 trillion yen deficit.

Takeshi Minami, chief economist at Norinchukin Research Institute, noted that the increase in export value was driven by the weak yen, rather than strong demand. "Europe-bound exports are weakening, U.S.-bound shipments are peaking, and demand from China is struggling to grow," Minami stressed. "As overall exports are likely to slow down, you cannot expect exports to become a main engine of growth over the next 1-2 years."

China, a key engine of global growth, faces challenges in mounting a solid post-COVID recovery amid a protracted property sector crisis. This has undermined the economies of major exporting nations such as Japan, placing a greater responsibility on domestic growth.

Policymakers' hopes of using exports to compensate for weak domestic consumption could be in trouble due to weakness in overseas demand. The growth in exports was largely driven by car sales, which increased in value by 13.6%. However, the volume of car exports dropped by 1.4%, indicating that the weak yen contributed to the inflated value.

Exports to China saw a 17.8% year-on-year increase in May, driven by demand for chip-making machinery. Shipments to the U.S., a key market for Japan, grew by 23.9% year-on-year, the highest increase since November 2022. Conversely, exports to the European Union fell by 10.1%.

These trends suggest that while the weak yen has boosted export values, the actual demand remains weak, highlighting the challenges faced by Japan's chemical industry and broader economy.