Containers in a shipping terminal at the Honmoku pier in Yokohama, Japan, on Monday, June 19, 2023.

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Japan posted its first monthly decline in exports in more than 2 years, as weaker demand in its biggest trading partners in China and the rest of Asia dimmed prospects for growth in the world’s third-largest economy.

Exports fell 0.3% in July from a year earlier for the first time since February 2021, according to provisional data released Thursday by Japan’s Ministry of Finance. Exports to Asia plunged almost 37%, while those to China contracted 13.4% in an eighth consecutive monthly decline, underscoring the magnitude of the slowdown in the mainland.

“Luckily at this moment, [the weakness in China exports] is completely offset by increase in exports to U.S. and Europe, but as you know, there are a lot of uncertainties with regard the U.S. and European economies,” Sayuri Shirai, an economics professor at Keio University, told CNBC “Squawk Box Asia” Thursday.

Japan’s domestic demand showed no meaningful improvement, underscored by imports that slumped 13.5% in July. Both export and import numbers were slightly better than expected, though Japan swung to a trade deficit of 78.7 billion yen (539.6 million dollars), falling far short of a median estimate for a 24.6 billion yen surplus.

A surge in imports had propelled a provisional 6% growth in Japan in the second quarter, though economists are expecting global demand to weaken in the second half of the year.

Professor discusses what's behind Japan's weak exports

“I think for Japan, Japan’s exports to China counts for 20% of its total and Asia, 50%, so we have to really watch what’s happening in China,” Shirai said.

Chinese premier Li Qiang said Wednesday the country would work to achieve its economic targets for the year. His remarks came on the back of a slew of economic data that fell short of expectations, which prompted economists to warn that China might not be able to achieve its 5% growth target.

Coupled with faltering domestic demand, the Bank of Japan is unlikely to have the impetus to move away from its ultra-easy monetary policy aimed at reflating the economy.

Continued weakness in the Japanese yen is another source of concern, as the currency touched 146 yen to the dollar.

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Shirai said BOJ intervention “could happen quite soon” since the Japanese yen is nearing 150 against the dollar, the level when Japan’s Finance Ministry intervened with roughly $68 billion to prop up the yen last September and October.  

Separate data released by the Japanese government showed core machinery orders — regarded by some as a leading indicator of capital expenditure despite its volatility — declined 5.8% in July from a year earlier.

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