Japanese export growth slows down in March, and US tariffs will definitely speed up downshift

Exports rose for the sixth month in a row in March, but with a slower speed

Japanese exports rose 3.9% in March to year (vs 11.4% in February, market consensus 4.4%), partly due to the initial effects of US tariffs.

Based on the goal, exports to the US still rose 3.1% despite the tariffs on iron, steel and aluminum. Indeed, iron and steel exports (-16.6%) decreased, but they only contributed 1.3% of total exports. So far, the overall impact is muted. The main export goods such as electric machines (6.1%) and transportation equipment (1.0%) are obtained, possibly encouraged by frontloading.

Meanwhile, exports to Asia grew 5.5%, which highlighted some interesting dynamics. Exports to China, Japan’s second largest export partner, fell -4.8%, while shipping to Hong Kong (19.7%), Taiwan (19.5%), and South Korea (11.5%) all recorded an increase in two digits. Also, semiconductors and exports of chip making machines to China dropped significantly. This is probably because of the export route in Asia to avoid conflicts of tariffs with the US. Because China is the largest semiconductor producer, we are worried about the lower cycle in this sector.

The market watching trade negotiations between the US and Japan

Trump claims “great progress” on the social platform of its truth after discussing with Japan, but there are no details that have been revealed. As expected, the US associated talks with an increase in Japanese expenditure for US troops in the country. Potentially, Japan is expected to be committed to buying more US goods, including LNG and agricultural products, and increasing direct investment in the US. Yen Japan lost land against the US dollar this morning in the news, the tariff of the currency was not discussed, at least not. We hope JPY will be one of the better in the FX market. Volatility is likely to depend on trade discussions.

We believe that strong JPY tends to reduce some inflationary pressures for the Bank of Japan (BOJ). However, BOJ is likely to maintain its policy normalization strategy, because the 2% inflation target tends to be met with strong wage growth and recovery of household consumption. Also, Boj is careful about sending Dovish signals to the market. This can trigger JPY’s weaknesses and attract criticism from the US.
Source: Ing