Japan’s July export boom reinforces our conviction in semiconductor trades

• Record exports, but quality matters: Japan’s exports surged 23.2% YoY to JPY11.5 trillion, but export volumes rose only 5.2%, with much of the increase driven by higher prices and the weak yen.
  
  
• Autos look less impressive beneath the surface: US auto export value jumped 32.1% YoY, yet unit shipments were virtually flat. Stronger shipments to Europe were encouraging, but Japanese automakers continue to face intense competition from lower-cost Chinese manufacturers.
  
  
• Semiconductor equipment shows genuine demand: Semiconductor manufacturing equipment exports recorded strong double-digit growth in both value and volume, providing clear evidence of genuine demand linked to AI infrastructure and global semiconductor capex.
  
  
• The weak yen is becoming a double-edged sword: While yen weakness supports exporters’ overseas earnings, it also raises Japan’s import costs, particularly for energy. If the Bank of Japan continues tightening and the yen strengthens, exporters that rely heavily on currency tailwinds rather than underlying demand growth could become increasingly vulnerable.
  
  
• Stay constructive with semiconductors as our top pick: Structural AI and semiconductor investment provides strong fundamental support to semiconductor equipment companies. We remain constructive on Japanese equities and see the Nikkei 225 reaching JPY76,820 by FY2028, implying 15.7% upside from the 28 August 2026 close.

Japan’s exports hit a monthly record in July, surging 23.2% year-on-year to JPY11.5 trillion, the fastest pace of growth since October 2022. Imports were even stronger, rising 27.9% YoY.

At first glance, the figures look clearly positive for Japan’s economy. Strong exports should provide an important boost to growth, particularly as domestic consumption remains relatively soft, as reflected in the 2Q GDP data.

However, the headline numbers mask a more nuanced picture. Much of July’s export growth came from higher prices and the weak yen, rather than a substantial increase in the volume of goods Japan actually shipped. This distinction matters for investors: a weak yen can inflate exporters’ earnings in yen terms, but sustained volume growth is a much stronger signal of genuine underlying demand.

The 23.2% export surge was largely a price and currency story

Japan’s Ministry of Finance data provides a useful breakdown between export volumes and unit values.

For total exports, the quantum index rose just 5.2% YoY, while the unit-value index jumped 17.1%. In other words, of the 23.2% increase in export value, the overwhelming majority reflected higher prices and currency effects, rather than a comparable increase in the amount of goods shipped.

The same pattern was even more pronounced on the import side. Import volumes increased only 1.2% YoY, while import unit values surged 26.3%. This tells us something important about Japan’s trade balance: the record import bill was not driven by a sudden surge in domestic demand for imported goods. Japan was largely paying more for roughly similar volumes of imports.

Autos: Strong export value masks a near-stall in US shipments

Autos were widely cited as one of the main drivers of Japan’s strong July exports. At the value level, that is true: motor vehicle exports increased 19.4% YoY.  But the unit data tells a very different story, with the number of vehicles exported globally increasing by just 0.6% YoY.

The divergence is particularly striking in the US, Japan’s most important auto export market. The value of Japanese auto exports to the US jumped 32.1% YoY, yet unit shipments increased just 0.1%. This suggests that the impressive headline growth was driven overwhelmingly by a combination of the weak yen and improved pricing, rather than stronger underlying demand. This is consistent with Japanese automakers becoming less reliant on aggressive discounting. Industry-wide average incentives in the US reportedly declined around 10% in July.

The picture was very different in Europe. Japanese vehicle shipments to the EU jumped 29.5% YoY in volume, while export value increased 46.8%. Here, the increase was not simply a currency story: Japanese automakers were genuinely shipping more vehicles to capture European market shares.

China remains the weakest link. Vehicle shipments to China collapsed 42.5% YoY, while export value fell 34.0%, highlighting the continuing loss of competitiveness for Japanese brands amid intense competition from local manufacturers, particularly in electric vehicles.

Taken together, the "strong auto exports" story is far less straightforward than the headline suggests. Japan’s auto export performance in July was effectively three different stories: stagnant US export volumes with value growth primarily driven by pricing and weak currency, genuine volume growth in Europe, and an accelerating retreat from China.

Semiconductor equipment: where Japan’s export growth looks genuinely strong

The semiconductor story is more encouraging — but only if we distinguish between semiconductor manufacturing equipment and chips themselves.

Semiconductor manufacturing equipment, in particular, showed the kind of growth that investors should pay attention to. Global unit shipments of semiconductor manufacturing equipment rose 36.2% YoY, while export value increased 40.7% YoY. The relatively small gap between volume and value growth suggests that Japan was not simply charging more for its equipment — it was shipping substantially more machines.

That is consistent with a healthy global semiconductor capital expenditure cycle, particularly as chipmakers continue to expand capacity to support AI-related demand. The regional figures reinforce the point. Equipment shipments to Asia rose 36.0% YoY in volume, while shipment volumes to the US and EU increased 38.5% and 49.1%, respectively.

The story is notably different for integrated circuits (ICs). Global IC unit shipments increased by just 7.5% YoY, while export value surged 52.0% YoY. The wide divergence suggests that the increase in chip trade value is being driven far more by higher prices than by broad-based growth in shipment volumes. This is consistent with the global memory repricing cycle, as memory capacity is increasingly being diverted towards AI-related demand, tightening supply across the broader memory market and driving prices higher. Companies such as Kioxia are also exposed to this dynamic through their NAND flash business, where tighter supply can support stronger pricing and improve profitability.

China stands out as the most extreme example of this volume–value divergence. IC unit shipments to China increased a relatively modest 15.6% YoY, yet export value surged 174.3% YoY. The sharp divergence highlights the growing supply-demand imbalance for high-performance chips in China. While domestic memory capacity is expanding, leading producers YMTC in NAND and CXMT in DRAM still have limited capacity relative to the scale of China’s rapidly growing demand, particularly for more advanced memory products used in AI applications. As a result, a significant portion of high-end IC demand continues to be met through imports, leaving Chinese buyers more exposed to paying a premium.

Energy imports: Japan is paying more — and changing where it buys

The import data highlights a different vulnerability. Japan’s dependence on imported energy means that higher global energy prices can quickly feed into the country’s import bill. In July, petroleum imports increased only 5.5% in volume, but their value surged 87.8% YoY.

The geographic shift was even more striking. Petroleum import volumes from the Middle East fell 32.8% YoY, while their value still increased 20.7%. At the same time, petroleum imports from the US surged 814.5% in volume, with value soaring 1,489.2%. As a result, the US accounted for around 36% of Japan’s petroleum imports in July, up from just 4% a year earlier (Figure 1).

Figure 1: Japan diversifies oil supplies, turning to the US

This is more than a simple price effect. The scale of the shift suggests that Japan has been actively diversifying its energy sourcing as geopolitical risks and shipping disruptions make reliance on Middle Eastern supply less attractive.

The immediate cost implications are also worth watching. Based on July trade data, Middle Eastern petroleum imports cost around JPY117,279 per kilolitre, compared with approximately JPY115,736 for US imports — trading at roughly 1.3% premium. This is a notable reversal from a year earlier, when Middle Eastern crude was around 2.0% cheaper than US barrels.

The fact that US crude is now cheaper despite the significantly longer shipping distance to Japan suggests that the economics of Japan’s energy sourcing have been heavily distorted by the elevated war risk and insurance costs associated with Middle Eastern supply routes. In other words, Japan’s shift towards US oil appears to reflect not only supply diversification, but also the changing risk-adjusted cost of sourcing from the Middle East.

Even if geopolitical tensions eventually ease, Japan may be reluctant to return fully to its previous dependence on Middle Eastern energy. Energy security has become a more important consideration, potentially leaving Japan with a structurally more diversified — but potentially more expensive — import mix.

Constructive on Japanese equities, with semiconductors as our top pick

The July trade data is encouraging, but the quality — rather than simply the size — of export growth is what matters for Japan’s economic and equity outlook. Much of the headline increase was driven by higher prices and the weak yen, while genuine volume growth was concentrated in a few areas, most notably semiconductor manufacturing equipment.

The weak yen is also becoming a double-edged sword. Trading around JPY160 against the US dollar has boosted the yen value of overseas earnings and supported exporters’ competitiveness. At the same time, it has raised the cost of imported energy and raw materials, adding pressure to Japan’s import bill. If the Bank of Japan continues tightening, a narrowing Japan-US interest-rate differential could support the yen, providing some relief on import costs but potentially eroding the currency advantage that has supported exporters’ earnings.

This creates an important distinction across different exporters. Japanese automakers appear more vulnerable to a stronger yen. Despite a more than 30% YoY increase in the value of US-bound auto exports, unit shipments were virtually flat, suggesting that the headline growth was driven largely by pricing and currency effects rather than stronger demand. While shipments to Europe grew strongly, Japanese manufacturers continue to face intensifying competition from lower-cost Chinese automakers, particularly in EVs. A stronger yen could therefore put additional pressure on margins and competitiveness.

In contrast, the growth of semiconductor and semiconductor manufacturing equipment ecosystem is likely more resilient. July’s data showed strong volume growth in semiconductor manufacturing equipment exports, supporting the view that Japan is benefiting from a genuine investment cycle rather than simply a favourable currency environment. Companies such as Tokyo Electron, Advantest and Kioxia, alongside their broader supply chains, are well positioned to benefit from continued AI infrastructure spending, advanced semiconductor capacity expansion and memory demand.

For investors, the takeaway is straightforward: Japan’s export boom is real, but the opportunities are unlikely to be evenly distributed. We favour companies where earnings growth is underpinned by structural demand and rising volumes, rather than those relying primarily on yen weakness and pricing power.

Overall, we remain constructive on Japanese equities, supported by resilient corporate earnings, AI-related tailwinds driving technology and industrial growth, improving capital efficiency and continued corporate reforms. The Nikkei 225, with its significant exposure to semiconductor and semiconductor equipment manufacturers, is well positioned to benefit from continued AI-related investment and the structural growth of the global semiconductor industry. We maintain our target of JPY76,820 by FY2028 (FY ended 31 March 2029), representing 15.7% upside from the closing level on 28 August 2026.

Table 1: Recommended Products

Categories	Products
ETF	·         Xtrackers Nikkei 225 UCITS ETF 1D (LSE: XDJP)
Unit Trusts	·         Eastspring Investments - Japan Dynamic AS SGD ·         Amova Japan Equity SGD

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.