By Makiko Yamazaki

TOKYO (Reuters) – Japan’s exports rose at a slightly slower pace than expected in July, and shipment volumes continued to decline, raising doubts about the economy’s recovery.

The outcome follows separate data indicating a robust rebound in Japan’s economy in the second quarter, which supported central bank monetary policy tightening.

Japanese exports rose 10.3% year-on-year in July, marking the eighth consecutive month of growth, albeit below the median market forecast of 11.4%. This increase was supported by a weaker yen, compared to a rise of 5.4% in June.

Overall shipment volumes fell 5.2% last month from a year ago, indicating a sixth month of declines. Chief economist Takeshi Minami noted that the weaker yen might be concealing soft global demand.

Minami expressed concerns regarding the outlook for global demand due to real estate issues in China and a cooling U.S. jobs market. He warned that a stronger yen could also slow export value.

Exports to China, Japan’s biggest trading partner, rose 7.2% in July, driven by demand for chip-making equipment. Exports to the U.S. also showed growth, rising 7.3%.

Imports increased by 16.6% in July, surpassing expectations. The trade balance recorded a deficit of 621.8 billion yen ($4.28 billion), worse than expected.

BOJ Challenge

Sustained wage growth and expectations for inflation to reach the Bank of Japan’s (BOJ) 2% target were key to recent interest rate hikes. However, challenges persist as the central bank moves away from ultra-loose monetary policy amid rising living costs.

Policymakers face a struggle as the export engine falters due to uneven foreign demand and softening in China. Governor Kazuo Ueda stated the BOJ would keep raising rates if economic and price projections align. Yet, uncertainty remains about the path to policy normalization.

Minami stated that with the export engine stalling, the economy must rely on a recovery in domestic consumption driven by wage growth. He anticipates another rate hike by year-end, contingent on market stability and solid consumption, though a strengthening yen could lead to a pause in rate increases next year.

($1 = 145.2700 yen)