Japan posted its largest-ever trade deficit of 3.5 trillion yen ($26 billion) in January after energy import prices jumped and export growth slowed, with record red ink logged with major trading partner China, the Finance Ministry said Thursday.

The deficit, roughly a 1.6-fold increase from a year earlier, exceeded the previous record of 2.82 trillion yen in August last year, highlighting the vulnerability of the resource-poor country that relies on other nations for energy.

Japan logged red ink for the 18th consecutive month, according to the ministry.

China's Lunar New Year holidays began in January, earlier than in recent years, likely contributing to Japan's biggest trade deficit with the country of 1.42 trillion yen. China-bound shipments tend to decline during the holiday period.

In January, total imports surged 17.8 percent to 10.05 trillion yen, boosted by coal, liquefied natural gas and crude oil, according to the ministry's preliminary report.

Exports rose 3.5 percent to 6.55 trillion yen, helped by U.S.-bound cars. The values of both imports and exports were the highest for the month of January since comparable data became available in 1979.

Slowing export growth is a worrying sign that the global economy is losing strength amid aggressive interest rate hikes in major economies.

"The fall in Chinese exports may be a seasonal factor but we'll need more data to see if that's the case. What's worrying is export volumes to the United States and Europe are not doing well, and slowing economic growth may be inevitable in these economies toward mid-2023," said Chisato Oshiba, an economist at Dai-ichi Life Research Institute.

"The surge in commodity prices and the yen's rapid depreciation seen last year may be over, reducing import costs. Crude oil prices have fallen but they are still at high levels and could stay there," Oshiba added.

Japan's exports to China dropped 17.1 percent to 967.45 billion yen, while imports rose 12.3 percent to 2.39 trillion yen.

Japan eked out a surplus of 280.68 billion yen with the United States, another major trading partner for Japan.

Exports to the United States increased 10.2 percent to 1.23 trillion yen, compared with imports that grew 21.5 percent to 950.36 billion yen, the highest amount for the month of January.

Japan had a trade deficit with the rest of Asia, including China, of 1.38 trillion yen, while it registered a deficit of 173.79 billion yen with the European Union.

The U.S. Federal Reserve has been hiking interest rates aggressively to fight inflation and the same is true in the eurozone.

Japan is still far from monetary policy tightening but financial markets are rife with speculation that the Bank of Japan's ultralow rate policy will be tweaked if academic Kazuo Ueda is approved by parliament to become the central bank's next governor.

The policy divergence between Japan and the United States has sharply weakened the yen against the dollar. While the intense selling pressure has eased somewhat, the Japanese currency remains 15 percent lower than in January 2022.

"It may be an indication that export growth supported by pent-up demand (in the United States and Europe) is taking a breather. The impact of rate hikes has yet to be fully seen," said Kota Suzuki, an economist at Daiwa Securities Co.

"Despite the easing of China's 'zero-COVID' policy the outlook for its economy is not rosy with simmering real estate woes. Japan's trade deficit will likely shrink in the coming months, but it will be difficult to return to the black," Suzuki said.


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