Japan's trade balance fell back into the red in July with a deficit of 78.7 billion yen ($538 million) as exports dropped for the first time in over two years, raising uncertainty over economic growth prospects, government data showed Thursday.

Exports dipped 0.3 percent from a year earlier to 8.73 trillion yen as a rise in auto shipments failed to offset declines among other products like semiconductor-related equipment. Imports, meanwhile, fell 13.5 percent to 8.8 trillion yen, according to the Finance Ministry.

The year-on-year fall in exports, the first since February 2021, cast a cloud over the outlook for the Japanese economy, which marked its fastest pace of growth since 2020 in the quarter to June.

The latest figures came a month after Japan reported its first trade surplus in nearly two years, though concerns persist about the impact of aggressive monetary tightening in the United States and Europe, and slowing growth in China.

Japan's trade surplus with the United States expanded 65 percent to 845.92 billion yen, as increased shipments of autos and heavy electrical machinery boosted exports by 13.5 percent to a highest-ever 1.79 trillion yen.

Imports dropped 11.2 percent to 945.31 billion yen, dragged down by liquefied natural gas and medicines, the preliminary data showed.

China-bound exports fell 13.4 percent to 1.54 trillion yen and imports declined 13.9 percent to 1.90 trillion yen, translating into a 359.21 billion yen deficit, down 15.7 percent from a year earlier.

"While auto exports were robust because automakers have been boosting output amid the easing of chip shortages, overall exports are not strong as a trend," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.

"China's recovery since the end of its 'zero-COVID' policy was far slower than expected and there is the issue of the troubled real estate sector there. At home, inflation is weighing on demand, so it's difficult to expect strong economic growth to continue," Kodama added.

For more than a year, surging import costs for fuel and raw materials, partly because of Russia's war in Ukraine, left resource-poor Japan in the red.

A weaker yen has exacerbated the pain for Japan by boosting the value of imports, accelerating inflation.

In July, the imported value of coal, crude oil and liquefied natural gas fell, while the yen was 4.6 percent weaker relative to the U.S. dollar than a year earlier.

The yen's depreciation against the dollar and the euro does not appear to have run its course, already slipping past levels at which Japanese authorities previously intervened to slow the currency's decline.

The Bank of Japan in July decided to allow long-term Japanese government bond yields to rise more, which would narrow the gap with U.S. yields as the Federal Reserve is in a rate hike cycle.

With the rest of Asia, including China, Japan's trade surplus shrank 35.7 percent to 253.73 billion yen in July.

Japan had a 20.69 billion yen trade deficit with the European Union, as imports hit their highest level for the month amid strong demand for autos and aircraft equipment.

Imports gained 21.4 percent to 967.70 billion yen, while exports rose 12.4 percent to 947.01 billion yen.


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