(Bloomberg) -- Japan’s trade deficit hit a record high in July as the impact of soaring commodities and the yen’s 24-year low added to the headwinds for the nation’s economic recovery.

The trade deficit widened to 2.13 trillion yen ($15.9 billion) on a seasonally adjusted basis, the finance ministry reported Wednesday, extending the sequence of shortfalls to a 14th month. The trade balance has been in the red for the longest continuous streak since 2015. 

Imports gained 47.2% from a year ago, led by continued year-on-year gains in energy prices, while exports increased 19%, boosted by growing shipments of autos and chip-making equipment. Both figures beat forecasts. 

The record deficit bodes ill for Japan’s economic recovery as higher import bills especially for energy and food can cool domestic activity. While exports continued to recover, they also face slowdown concerns in the nation’s key trading partners such as the US and Europe, where governments are actively tamping down demand to contain rampant inflation. 

“Energy remains a dominant factor behind import gains, which is not necessarily good for growth,” said Koya Miyamae, an economist at SMBC Nikko Securities Inc. “Oil prices have been calming down somewhat, but energy costs can hit the brakes on economic activity if they keep rising.”

The yen’s drop to a 24-year low versus the dollar in July made imports more expensive while making exports cheaper. The trade data showed the average exchange rate was 136.05 yen to the dollar, 23.1% weaker than a year ago. The yen has rebounded recently as US inflation showed signs of peaking, limiting demand for the dollar. 

Due to its reliance on energy and food from overseas, Japan has seen import costs soar amid the war in Ukraine and supply snarls tied to China’s coronavirus lockdowns. Oil prices fell in July from the previous month as global economic slowdown worries offset supply concerns, but the outlook remains uncertain. Imports and exports in July both extended record highs in value while staying relatively unchanged by volume, highlighting the impact of inflation, especially on energy prices.

The report showed exports to the US rose 13.8% and those to Europe increased 31.6%. Shipments to China climbed 12.8%, for the biggest gain since February. 

“The end of China’s Covid lockdowns has driven up exports -- that’s the biggest factor,” said Miyamae. “The recovery pace in exports is not strong enough to recoup all the losses, but it’s going in the right direction.”

What Bloomberg Economics Says...

“The bad news -- the trade balance is increasingly to Japan’s disadvantage. Trading losses are weighing on corporate profits. A wider deficit will probably drag on GDP growth in the third quarter.”

--Economist, Yuki Masujima

To read the full report, click here

Separately, core machine orders, a leading indicator of capital investment, gained 0.9% in June from May, the Cabinet Office reported Wednesday. Economists had forecast a 1% rise. From a year ago, it increased 6.5%.

Japan’s economy regained its pre-pandemic size in the second quarter as a rebound in consumer spending drove gains. Still, given the uncertainties in the outlook the government plans to ramp up its support for the economy. 

Prime Minister Fumio Kishida has ordered additional measures to ease the impact of inflation, after polls showed his approval rating declined following his cabinet overhaul.

(Updates to add further details from the report, economist comments)

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