Japan’s trade balance shrank unexpectedly in December, falling to a surplus of 105.69 billion yen ($6.7 billion) from 316.7 billion yen in the prior month, according to Ministry of Finance data. This drop was driven by a slower-than-anticipated increase in exports, which rose by 5.1% year-on-year, missing expectations of 6.1% growth.

The slowdown was particularly evident in exports to the U.S., Japan’s largest export market, where shipments declined by 11.1%. This decrease is attributed to ongoing trade tariffs imposed by U.S. President Donald Trump in 2025, despite a recent trade deal between the two countries. The cooling of American demand for Japanese goods, due to muted consumer spending in the U.S., further exacerbated the situation.

On the other hand, exports to Asia, particularly China, showed resilience, with shipments to China rising by 5.6% despite diplomatic tensions. The relatively weaker yen also supported exports, while local demand in Japan saw a notable increase, with imports rising by 5.3%, driven largely by food and chemical imports. This surge in imports, much higher than the expected 3.6%, reflects a robust domestic market.

This unexpected contraction in Japan’s trade balance has significant implications for the country’s economic outlook, as it signals potential challenges ahead for its export-dependent economy. Investors and analysts are now closely monitoring how these trade dynamics will impact Japan’s economic growth and monetary policy decisions in the coming months.