Japan’s exports expanded at the weakest pace in over two years amid a global economic slowdown, adding to uncertainty over the country’s growth outlook amid speculation Prime Minister Fumio Kishida may be considering an early election. 

The value of exports rose 0.6% from a year earlier in May, the slowest pace since February 2021, the finance ministry reported Thursday. That compared with analysts’ expectation of a 1.2% decline, and though better than forecast still reflected the trend of weakening global trade. Declines in exports of mineral fuel, chip making machinery and semiconductor parts dragged on Japan’s shipments abroad.

Imports were also down 9.9%, with falls in fuel prices contributing to the drop from a year ago. The decline was the biggest in over two years and came largely in line with economist expectations.

The deceleration in exports reflects the impact of stagnation in external demand, particularly for semiconductors. The figures also suggested overseas shipments would have fallen without a recovery in the auto sector, as easing supply chain disruptions help boost car output.

“Today’s results once again made it clear that exports are weak, with the exception of automobiles. The Bank of Japan often uses the phrase ‘high uncertainty in overseas economies,’ and it will keep a close eye on that,” said Ryosuke Katagi, a market economist at Mizuho Securities Co. 

Exports of production gear for chips and other items fell 20% from a year ago, with those to China dropping 11%. There are concerns that US-led efforts to thwart China’s ambition to make leading-edge semiconductors may disrupt trade in the sector. In July, Japan is set to implement its new export curbs, which officials say are not targeting any specific nation.

Thursday’s results come amid debate over whether Kishida will call an election in the coming days or delay until autumn or later. Speculation over an early poll has been smoldering recently, driven by an action-packed Group of Seven summit and stocks hovering near their highest levels in over three decades. Kishida also didn’t rule out calling an election during a press conference held Tuesday.

What Bloomberg Economics Says...

“Japan’s trade data for May showed exports holding up slightly better than the consensus forecast. The main takeaway is that a healing supply chain is providing key support to the recovery even as global growth slows.”

— Taro Kimura, economist

The trade report showed shipments to the US rose 9.4% compared to a year ago, suggesting the world’s largest economy is now doing better than expected, while exports to Europe increased 16.6%. Shipments to China fell for the sixth month in May, dropping 3.4% and indicating a continued slowdown. Chinese policymakers are ramping up stimulus in an effort to reignite the world’s second largest economy.

The trade deficit was still large at 1.37 trillion yen ($9.8 billion), likely remaining a drag on the country’s recovery from the pandemic. Net exports were one factor that pushed down the country’s otherwise solid growth in the first three months of the year.

For Thursday’s trade data, the average exchange rate was 135.31 yen against the dollar, 4.8% weaker than a year ago. The yen has since softened further to around 140 yen per dollar, but still remains stronger than levels that caused the government to intervene in currency markets last year.

Indication of limited recovery prospects via global demand may also make Japan’s central bank cautious about policy changes ahead of Friday’s meeting. Sustained economic growth is key to whether the BOJ can move away from its ultra-easy monetary policy.

The latest Bloomberg survey showed that almost all BOJ watchers expect no major policy shift this week. 

“For now cars are likely to keep supporting exports,” said Chisato Oshiba, an economist at Dai-Ichi Life Research Institute. “But if you take that out you can see the clear decline in exports — it all depends on how long the auto support will last but I think a recovery will be difficult.”