Official figures released on Friday revealed that the Japanese economy experienced a contraction of 0.7% in the first quarter, measured annually, with economists attributing this downturn to the impact of US President Donald Trump's trade disputes, which negatively affected export performance and undermined consumer sentiment.

Preliminary, seasonally adjusted Cabinet Office figures revealed that Japan's real gross domestic product, a key indicator of national economic output, contracted by an unexpectedly sharp 0.2% in the first quarter of the year, marking the first decline in economic activity for twelve months.

A 2.3% annualized decrease was observed in exports. Consumer spending stagnated, even as capital investment saw a 5.8% expansion.

Trump's imposition of tariffs threatens to significantly impact Japan's major exporters, particularly its automotive industry, affecting not only goods directly exported from Japan but also those originating from countries like Mexico and Canada; officials concede that formulating a coherent response remains problematic given the US President's frequently shifting policies.

S&P Global Ratings noted in a report that regional automakers are confronting escalating operational expenditures and the threat of diminished revenue streams, as their U.S. sales are contingent on multifaceted production infrastructures and intricate supply networks.

The report cautioned that even businesses with negligible U.S. sales could experience substantial, albeit indirect, repercussions as tariffs distort the global economy and dampen consumer demand.

The Japanese economy has been mired in a protracted slump, hampered by flagging demand stemming from its demographic challenges, namely an ageing and shrinking population coupled with declining marriage and birth rates.

The Bank of Japan, long committed to a zero or negative interest rate policy, has progressively adjusted its benchmark rate upwards, citing resilient wage growth and a gradual increase in price levels as justification.

The recent data, underscoring the precarious state of the economy, increases the probability that the central bank will refrain from implementing additional interest rate increases.

Certain analysts are now championing a reduction in the 10% consumption tax – analogous to sales taxes elsewhere – to mitigate the financial strain on households.

However, Prime Minister Shigeru Ishiba has yet to express his endorsement of the proposal, particularly given the considerable strain on Japan's national finances stemming from escalating social welfare expenditure.

The economy expanded at an annualized rate of 2.4% in the final quarter of 2024.