TOKYO – Japan’s trade deficit surged to a record in January as exports to China dropped sharply and the global economy slowed.

The trade gap jumped to 3.5 trillion yen (S$34.9 billion) from 1.45 trillion yen in December, the Finance Ministry reported on Thursday. The deficit far exceeded the previous record of 2.82 trillion yen, although it was smaller than analysts’ estimates of 3.98 trillion yen.

Export growth slowed sharply to 3.5 per cent, with chipmaking equipment among the largest drags, in a sign of weakening global tech sector demand.

The value of shipments to China sank 17.1 per cent, dragged down by cars, auto parts and chip machinery.

Exports to the United States and Europe also grew at a weaker pace of 10.2 per cent and 9.5 per cent, respectively. 

Meanwhile, imports continued to show double-digit gains, with a 17.8 per cent rise from a year ago, as costly energy shipments continued to inflate the import bill. 

Japanese companies also likely tried to secure inventory from China before the Chinese New Year celebrations.

The record deficit casts a cloud over Japan’s economy as it struggles for recovery momentum, with a new Bank of Japan (BOJ) governor set to take over from Mr Haruhiko Kuroda and his decade of monetary easing. While one-off factors contributed to the deficit, the government and the central bank will need to keep a close eye on how much growth is slowing abroad.

“Japan’s exports are unlikely to show a strong pickup, so the overall economy will probably continue to have a lacklustre recovery,” said Norinchukin Research Institute chief economist Takeshi Minami. “That will be a headache for the BOJ when (policymakers) consider normalisation.”

China’s sudden turnaround on its virus policy has also meant a hit to Japan’s exports as Covid-19 cases surged following the end of the zero-Covid policy, causing disruption across the country. Shipments to China and other Asian countries account for more than 50 per cent of Japan’s overall exports.

Bloomberg Economics analyst Yuki Masujima said: “Looking ahead, we expect the trade deficit to narrow sharply in February, driven by a year-on-year jump in exports. The average of the shortfalls in January and February, though, will probably be on a par with the deficit in December 2022.”

The data also showed that the average exchange rate in January was 132.08 yen to the US dollar, 15 per cent weaker than a year earlier. Although the effects of the weaker yen and higher oil prices – the two main factors behind the prolonged trade deficit – have faded compared with 2022’s peak, they still appear to be lingering.

Another round of expanding import bills may trigger further price hikes. Nationwide inflation reached a 41-year high in December as companies, especially food manufacturers, passed on higher costs to their products.

Accelerating inflation has eaten into consumers’ purchasing power, a trend reflected in household spending’s second straight month of decline in December.

“What is not certain is how quickly the deficit will shrink as the global economy is expected to slow further from here,” said Mr Minami. “There is less pessimism emerging over the global economic outlook, but I would say the effect of a rapid tightening by central banks will hit harder in the coming months.” BLOOMBERG