Japan's exports grew more than expected in January, and the Bank of Japan's door to interest rate hikes remained open

Strong overseas demand could help boost Japan's Q1 GDP, thereby supporting the BOJ to continue its move towards monetary policy normalization.

Japan's exports rose more than expected in January, providing much-needed support to the economy and opening the door for the Bank of Japan to phase out its negative interest rate policy.

The Ministry of Finance reported that Japan's exports rose 11.9% year-on-year in January, beating economists' expectations of 9.5%. Japan's imports fell 9.6% in January, the 10th consecutive month of decline, and were estimated to fall 8.7%, weighed down by a decline in coal and LNG imports.

In addition, Japan has reproduced a large trade deficit of 1.76 trillion yen (about 11.7 billion US dollars).

Export growth is a positive sign for the Japanese economy as it unexpectedly fell into recession in the last quarter of 2023 due to stagnant domestic spending.

Evidence of relatively stable external demand is likely to support the market's view that the BoJ can continue to move towards monetary policy normalisation, which many economists expect the BoJ to achieve by April. The Bank of Japan's policy committee recently tried to reassure the market that the first interest rate hike since 2007 will not lead to fundamental changes and that Japan's financial conditions will remain accommodative for the time being.

Harumi Taguchi, chief economist at S&P Global Market Intelligence, said: "Demand for electronics and chip-making equipment is recovering, and lower imports mean inflation is stabilizing and helping boost consumer confidence. I think that if the BOJ can confirm that wages are strong, then it can continue to seek a stance of raising interest rates in April. ”

Shipments of automobiles and auto parts, as well as chip-making equipment, were the main engines of Japan's export growth in January.

Economist Taro Kimura said: "Strong shipments of automobiles and semiconductor-related products continued to boost exports, offsetting the impact of weaker domestic demand. This suggests that external demand is likely to ease the third consecutive quarter of GDP contraction in the first three months of 2024. ”

However, Kota Suzuki, an economist at Daiwa Securities, said the gains were "likely to be temporary" and that "usually in January, a surge in demand ahead of the Lunar New Year holiday boosts exports." ”

Bank of Japan Governor Kazuo Ueda reiterated his view last week that the central bank will continue to carefully interpret the data to judge whether the gradual economic recovery will continue. According to Forexlive analysts, this could mean that the rate hike will need to wait until after the next positive GDP reading, which will be released on May 16.

Wednesday's data also showed that seasonally adjusted exports fell 3.6% from December, suggesting that underlying trends may be more fragile than the headline data suggests.

Looking ahead, external demand is likely to fluctuate as some of Japan's major trading partners expect slower growth in 2024. In its latest quarterly outlook released last month, the Bank of Japan said it was "expected to face downward pressure" on the Japanese economy due to a slowdown in the pace of recovery in overseas economies. U.S. economic growth is expected to slow to 1.6% this year.

"If you look at the world economy as a whole, it's slowing down, so exports aren't going to be that big of a boost to economic growth. Takeshi Minami, chief economist at Norinchukin Research, said.