Japan's trade engine slows in September, but chips keep running

• Export growth is losing some momentum: September exports rose 16.7% YoY, but volumes grew just 1.9%, with gains largely driven by higher prices. Fading yen support and softer global demand are weighing on growth.
  
  
• Semiconductor equipment outshines memory: Equipment export volumes surged 38.4% YoY on strong global demand, while IC exports remained price-driven, with early signs of moderating memory price gains.
  
  
• Rising energy costs squeeze purchasing power: Middle East supply disruptions have accelerated Japan's shift towards US petroleum, while higher import costs are pressuring household spending and adding to inflation.
  
  
• Stay selective on Japanese equities: We favour semiconductor equipment, advanced manufacturing and financials, while remaining cautious on memory pricing risks and domestic businesses exposed to rising import costs.
  
  
• We recommend the Xtrackers Nikkei 225 UCITS ETF 1D (LSE: XDJP) for its low annual expense ratio of 0.09%, or the iFAST Xtrackers Nikkei 225 UCITS Index ETF (SGX: JPY) for SGD trading, local market hours and a lower capital outlay. For selective active exposure, we favour Amova Japan Equity SGD, which invests across market capitalisations, with a focus on industrials, financials and consumer sectors.

Japan's exports are still growing at an impressive pace at the headline level. Exports surged 16.7% year-on-year (YoY) to JPY10.97 trillion in September, marking the 13th consecutive month of growth. However, consistent with the trend highlighted in our previous updates, higher export prices, rather than stronger shipment volumes, continued to account for most of the growth. Export unit values rose 14.5% YoY, while shipment volumes increased by just 1.9%, extending a pattern that has persisted throughout 2026 (Figure 1).

A weaker yen has played an important role. Japan's Ministry of Finance (MoF) reported an average exchange rate of JPY157.4 per US dollar in September, compared with JPY147.6 a year earlier. This 6.7% depreciation helped inflate the yen-denominated value of exports, while higher semiconductor and non-ferrous metal prices provided additional support.

Figure 1: Higher prices, rather than shipment volumes, continue to drive Japan's export growth

However, the more important question is why export growth has started to slow despite these favourable pricing conditions. September's 16.7% growth missed market expectations of 20.1% and marked a second consecutive slowdown from July's peak of 23.2%.

Part of the explanation lies in the yen. Back in July, the currency was 11.2% weaker than a year earlier, compared with September's 6.7% depreciation. In other words, the currency advantage that boosted export values earlier in the year is gradually fading.

But this is only half the story. Japan is also shipping fewer additional goods than it was just two months ago. Overall export volume growth slowed from 5.2% YoY in July to just 1.9% in September, reflecting softer demand across several major markets.

The contrast is particularly striking in the US. Export volume growth nearly halved from 20.4% YoY in July to 11.8% in September. Yet export values remained resilient, growing 22.9%, roughly in line with July's 22.0%. Stronger unit values continued to offset weaker shipment momentum, particularly in automobiles, semiconductor manufacturing equipment and power-generating machinery.

China and Europe painted a less encouraging picture, with export volumes shifting from growth into contraction. In China, semiconductor manufacturing equipment export growth slowed from 46.7% YoY in July to 19.6% in September. However, this does not necessarily signal a fundamental deterioration in semiconductor investment. The slowdown could reflect the uneven timing of equipment deliveries following stronger shipments earlier in the year, or changes in supply-chain routing. A single month's moderation is insufficient to establish a broader weakening in demand. Automobile exports, however, showed more pronounced weakness, with shipment volumes contracting 64.5%, compared with a 42.7% decline in July. Meanwhile, exports to Europe were weighed down by weaker shipments of power-generating machinery, plastic materials and non-ferrous metals, consistent with subdued European industrial production.

Taken together, September's trade figures suggest that Japan is losing some of the momentum that supported its strong export performance earlier this year. The yen is providing less support, while shipment growth is becoming increasingly uneven.

Semiconductor equipment remains the clearest source of genuine export demand

Japan's overall export momentum may be slowing, but its semiconductor industry continues to stand out. In September, exports of integrated circuits (ICs) surged 55.5% YoY, while semiconductor manufacturing equipment exports jumped 43.9%. These were among the strongest performances across Japan's major export categories.

However, their underlying growth drivers differ considerably.

Table 1: Semiconductor equipment growth is volume-driven, while ICs, automobiles and non-ferrous metals benefit more from higher prices

Key Category	Value YoY	Volume YoY	*Implied price YoY
Electrical machinery	30.3%	–	–
ICs	55.5%	14.1%	36%
Machinery	18.4%	–	–
Semiconductor equipment	43.9%	38.4%	4%
Power generating machinery	22.6%	9.0%	12%
Transport equipment	10.8%	–	–
Cars	16.5%	0.2%	16%
Chemicals	16.4%	–	–
Manufactured goods	12.7%	–	–
Nonferrous metals	27.8%	−20.8%	61%
*Implied price = (1 + value growth) ÷ (1 + volume growth) − 1 Source: Ministry of Finance, iFAST compilations and calculations. Data as of 30 Sept 2026.

Semiconductor manufacturing equipment represents the strongest evidence of genuine underlying demand. Export volumes surged 38.4% YoY, accounting for the vast majority of the category's 43.9% increase in value. Implied unit prices rose by only around 4%, suggesting that growth has been driven primarily by stronger equipment shipments rather than pricing effects.

Importantly, demand remains geographically diversified. While export value growth to China moderated to 14.3% YoY, export value to South Korea, ASEAN and the US surged by approximately 82%, 81% and 93%, respectively. These markets are benefiting from continued investment in advanced semiconductor manufacturing, particularly as AI-related computing demand drives expansion in leading-edge logic, high-bandwidth memory and advanced packaging capacity.

In contrast, Japan's IC export growth remains considerably more price-driven. Export values surged 55.5% YoY, while shipment volumes rose only 14.1%, implying roughly a 36% increase in unit values. This divergence is consistent with the ongoing memory upcycle, particularly given Japan's exposure to NAND flash production through Kioxia and the manufacturing ecosystem associated with its Yokkaichi and Kitakami facilities.

ASEAN was the standout market, with IC export values surging 160.6% YoY despite shipment volumes increasing by only 9.7%. The sharp divergence suggests a significant improvement in the average value or product mix of chips shipped to the region. Implied unit values reached JPY127 million per reported quantity unit, roughly double August's JPY62 million. In contrast, exports to China grew just 8.2% in value despite a robust 27.3% increase in volumes. Implied unit values fell to JPY39 million, substantially below July and August levels of approximately JPY87 million and JPY99 million, respectively.

This divergence may point to a shift in the destination or product mix of Japan's semiconductor exports, rather than a broad deterioration in Chinese demand. One possible explanation is that a greater share of higher-value memory products is being shipped to Southeast Asian assembly, testing or packaging facilities, while China's September imports were more heavily weighted towards lower-value semiconductor products.

Table 2: Japan's IC exports by destination, September 2026

Sept-26	IC value (JPY bn)	Value YoY	Volume YoY	Units	Price per unit chip (JPY Mn)
Asia	710	56.3%	14.5%	6552	108
ASEAN	243	160.6%	9.7%	1920	127
Korea	57	0.1%	10.4%	386	149
China	95	8.2%	27.3%	2432	39
US	11	33.6%	-4.6%	102	108
EU	10	32.7%	0.6%	37	273
Source: Source: Ministry of Finance., iFAST Compilations. Data as of 30 Sept 2026.

There is another development worth watching more closely: the pace of memory price appreciation. Japan's implied IC export unit-price growth slowed to around 36% YoY in September, compared with a peak of approximately 71% in May. Aggregate unit values also eased slightly from around JPY112 million in August to JPY109 million in September (Figure 2).

Figure 2: Japan's IC export unit values remain elevated, but the pace of appreciation is moderating

This does not necessarily mean that memory prices have entered a downturn. Rather, the most aggressive phase of price increases may be moderating, even as supply shortages persist. Following months of sharp price increases, memory prices have reached elevated levels, making it increasingly difficult for customers to absorb further substantial hikes and potentially limiting the scope for another rapid surge in the near term. Nevertheless, elevated prices can continue to support manufacturers' revenue and profitability, even if the pace of appreciation slows. The key risk for investors is that earnings expectations may already reflect sustained, aggressive price increases. Any moderation in pricing momentum could therefore prompt downward earnings revisions and put pressure on valuations, even without an outright decline in memory prices.

For Japanese semiconductor stocks, we therefore see a growing divergence between equipment manufacturers, which continue to benefit from tangible capacity expansion, and memory producers, whose earnings outlook is more sensitive to future selling prices and supply discipline.

Rising chip imports and energy supply disruptions are pushing up Japan's import bill

Japan's imports reveal the other side of the AI boom

The global AI investment boom is clearly benefiting Japan's semiconductor exporters. But it is also having an interesting effect on the opposite side of Japan's trade accounts. Japan is earning more from supplying the global semiconductor industry, while simultaneously spending considerably more on importing chips for its own technology needs.

In September, overall import volumes actually declined 1.6% YoY. Yet import unit values surged 20.8%, pushing Japan's import bill sharply higher. Semiconductors were among the most striking contributors. The value of IC imports from South Korea jumped 401.9% YoY, supported by a 109.5% increase in volume. This points to both significantly greater procurement and a sharp increase in the average value of imported chips. Japan does not have a comparable domestic position in leading-edge logic, DRAM or HBM. The surge in semiconductor imports from South Korea therefore highlights a corresponding dependency on overseas memory suppliers.

A similar trend is emerging in high-performance computing hardware. The value of Japan's computer imports from the US surged 130.7% YoY despite a decline in shipment volumes, suggesting a strong demand for higher-value, more sophisticated computing systems. This highlights Japan's growing demand for advanced computing infrastructure, which its domestic manufacturing industry has yet to produce at sufficient scale.

This is also why initiatives such as Rapidus' planned 2nm logic production and TSMC's operations in Kumamoto are strategically important. Over time, greater domestic semiconductor production could reduce some of Japan's reliance on overseas supply, although meaningful production at the leading edge will take time to scale.

The Hormuz disruption is reshaping Japan's energy imports

Japan's energy import figures reveal just how profoundly the Middle East conflict has disrupted its traditional supply chain. In September, petroleum imports from the United States surged 819.7% YoY in value and 513.8% in volume. As a result, the US accounted for 33.4% of Japan's petroleum import volumes, compared with just 5.6% a year earlier. Meanwhile, the Middle East's share fell from 91.3% a year ago to 62.0% in September 2026.

This marks a remarkable shift in Japan's energy supply structure within just one year. With many Japan-bound tankers continuing to avoid the Strait of Hormuz, some Middle Eastern crude is being loaded through alternative arrangements, including ship-to-ship transfers off Oman and Fujairah.

However, diversifying energy supplies has come at a cost. Based on the MoF's average exchange rate of JPY157.4 per US dollar, Japan's imported Middle Eastern crude cost approximately USD99.2 per barrel in September, compared with USD103.5 for US crude. The premium on US crude may partly reflect longer shipping distances from the US Gulf Coast, which increase freight and insurance costs included in cost, insurance and freight (CIF) import prices, as well as differences in crude quality.

More importantly, both sources have become substantially more expensive, with Japan's import prices for Middle Eastern and US crude rising approximately 45% and 50% YoY, respectively. This highlights that while diversification can reduce supply disruption risks, it does not shield Japan from higher global energy prices.

For an economy heavily dependent on imported energy, rising oil prices have far-reaching implications, pushing up manufacturing costs, transportation expenses and electricity bills, ultimately weighing on household spending. Signs of pressure on domestic consumption are already evident, with Japan's household spending contracting by more than 3% YoY in each month from June to August.  At the same time, as businesses pass higher energy and imported input costs on to consumers, inflationary pressures are beginning to intensify. Both headline and core inflation reached 2.1% YoY in September, moving above the BOJ's 2% target. While government fuel subsidies have helped cushion the impact of higher energy prices, the reduction in subsidy support from October onwards could trigger another round of price increases.

What does it mean for Japanese equities?

September's trade report delivers two very different messages for Japanese equities. The positive is that Japan's semiconductor and advanced manufacturing industries remain firmly supported by the global AI investment cycle.  The concern is that the broader export strength is losing momentum, while higher import costs are putting greater pressure on Japan's domestic economy.

That means simply buying Japanese exporters because the yen is weak may no longer be enough. Instead, we believe investors should become more selective, focusing on companies with genuine earnings growth drivers rather than those relying predominantly on favourable currency movements or higher selling prices.

Our preferred opportunities remain concentrated in three areas.

First, semiconductor equipment and advanced manufacturing. We continue to favour companies such as Tokyo Electron, Advantest, SCREEN, Kokusai Electric and DISCO. Although their exposures differ across fabrication, testing and precision processing, they are positioned to benefit from the increasing complexity of semiconductor manufacturing and sustained investment in advanced production capacity.

Second, selected memory and advanced materials companies. Kioxia, JX Advanced Metals and other materials suppliers remain beneficiaries of semiconductor demand. However, the moderation in IC export unit-price growth reinforces the importance of monitoring memory prices, inventories and customer capital expenditure. We remain constructive, but believe valuations should reflect the cyclical nature of these businesses.

Third, Japanese financials. Banks and insurers remain attractive as the BOJ gradually normalises monetary policy. Higher rates can improve lending margins and reinvestment yields, although the benefits will differ across institutions depending on their funding structures and balance sheets.

Meanwhile, we are also cautious on domestically oriented businesses with high exposure to energy and import costs, particularly those with limited ability to pass higher expenses on to customers.

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 JPY77,182 by FY2028 (FY ended 31 March 2029), representing 24.1% upside from the closing level on 26 October 2026.

For low-cost passive exposure, we recommend the Xtrackers Nikkei 225 UCITS ETF 1D (LSE: XDJP), with a low expense ratio of just 0.09% annually. Alternatively, Singapore investors seeking local trading hours, SGD-denominated trading and a lower investment entry point can consider the iFAST Xtrackers Nikkei 225 UCITS Index ETF (SGX: JPY). For investors preferring a more selective, actively managed approach, we favour the Amova Japan Equity SGD, which provides diversified exposure to Japanese companies across market capitalisations, with a focus on opportunities in the industrial, financial and consumer sectors.

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.