Japan’s exports expanded at the weakest pace in over two years amid a global economic slowdown, an outcome that adds 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 down 9.9% from the previous year, with falls in fuel prices contributing to the drop from a year ago. The drop was the biggest in over two years. Economists had forecast a 10.3% decline.

The deceleration in exports reflects the impact of stagnation in external demand. Earlier indicators suggested sluggish production activity in Japan’s major trading partners such as the US, Europe and China.

The trade deficit was still large at 1.37 trillion yen, 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.

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...

“Weakness in global semiconductor demand likely dragged down exports, outweighing increased auto shipments made possible by easing parts shortages.”

— Taro Kimura, economist

For the full report, click here

The trade report showed shipments to the US rose 9.4% compared to a year ago, while those to Europe increased 16.6%. Exports to China fell for the sixth month in May, dropping 3.4%, indicating a continued slowdown in the world’s second largest economy.

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 Bank of Japan 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.

(Updates with more details from the report)