Growth in Japanese export values lost steam further in December on slowing global demand as China struggles with a renewed spike in Covid infections and deaths, while softer energy markets and the yen's slight rebound also reduced import values, leading to a narrower trade deficit, data released Thursday by the Ministry of Finance showed.

Shipments to China, the key export market for Japanese goods, posted their first year-over-year decline in seven months in December as the world's second-largest economy has been hit by the resurgence of the pandemic since Beijing lifted its strict zero-Covid public health rules last month. Demand from China had picked up from the negative impact of a two-month Covid lockdown of the port city of Shanghai that ended at the end of May.

The Econoday Consensus Divergence Index stood at plus 4, just above zero, which indicates the Japanese economy is performing slightly better than expected after underperforming recently. Excluding the impact of inflation, the index was at minus 2.

Bank of Japan Governor Haruhiko Kuroda told reporters on Wednesday that the bank needs to maintain its accommodative monetary policy stance under the yield curve control framework until inflation reaches stable 2 percent with solid wage growth and a positive output gap.

Export values rose 11.5 percent on the year in December for the 22nd straight rise after rising 20.0 percent in November and 25.3 percent in October to a fresh record high of ¥9.0 trillion in October. The pace of growth was higher than the median forecast of a 9.6 percent gain. Amid slowing global economic growth, export volumes fell 7.1 percent on the year for the ninth drop in 12 months after falling 3.6 percent in November, edging down 0.3 percent in October and rising 7.3 percent in September.

The increase in December export values was led by the recent pickup in automobile shipments, thanks to easing global supply constraints, and solid demand construction and mining equipment, as seen in the prior month.

Import values rose 20.6 percent on the year in December, also slowing from increases of 30.3 percent in November and 53.5 percent to ¥11.17 trillion in October, which was a record high amount for the eighth consecutive month. It was the 23rd straight increase and in line with the median forecast of a 20.6 percent rise. Import volumes dipped 6.4 percent in December after slipping 4.6 percent in November and rebounding 5.6 percent in October and falling 1.7 percent in September.

The increase in import values was led by higher prices for coal, crude oil and natural gas, compared to year-earlier levels, as seen in recent months. Japan is also importing drugs from the US and Europe to cope with rising Covid infections and deaths.

The trade balance came to a deficit of ¥1.448 trillion (¥1,448.5 billion) in December. It marked the 17th straight month of a shortfall after posting a revised deficit of ¥2.029 trillion in November and a record high shortfall of ¥2.820 trillion in August. It compares to a deficit of ¥603.09 billion in December 2021. The gap was wider than the consensus forecast of a ¥1.653 trillion (¥1,652.8 billion).

For the whole of calendar 2022, Japanese exports rose 18.2 percent on the year to a record high of ¥98.19 trillion for the second straight rise after a 21.5 percent gain in 2021, led by solid demand for automobiles, mineral fuels and iron and steel, while imports surged 39.2 percent to ¥118.16 trillion, also the highest on record, on the back of high costs of imported oil and gas, marking the second rise in a row after a 24.8 percent rise in 2021. The result was a record high annual trade deficit of ¥19.97 trillion following a deficit of ¥1.78 trillion in 2021 and a small ¥388.29 billion surplus in 2020.

The year-over-year rise in Japanese export values is forecast to have decelerated to 9.6 percent in December from 20.0 percent in November on slowing global demand as China struggles with a renewed spike in Covid cases. Lower energy markets and the yen's slight rebound are also expected to have slowed the pace of import gains to 20.6 percent from 30.3 percent. The trade deficit is forecast at ¥1.653 trillion, narrower than a revised ¥2.029 trillion seen the previous month.

Merchandise Trade balance measures the difference between imports and exports of both tangible goods and services. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade.

Japan's merchandise trade balance measures visible trade and excludes services. Specifically it is the difference between imports of goods and exports of goods. A positive value indicates a trade surplus (exports exceed imports) while a negative value indicates a trade deficit (imports exceed exports). Movements in the trade balance reflect altered demand for Japanese exports which subsequently impact the yen's value and directly affect GDP growth because of the economy's dependence on trade.

The report gives insight into changing trends regarding Japanese trade. Such developments are especially important for Japan, which is an export-oriented economy that has historically experienced large trade surpluses and any change can have a dramatic effect on the domestic economy. Typically the headline number is the change from the previous year in yen along with the percentage change in exports and in imports from the previous year.