Official figures released on Friday revealed that the Japanese economy shrank by 0.7% year-on-year in the first quarter, with exports suffering from the impact of US President Donald Trump's trade disputes and a subsequent decline in consumer confidence.

Preliminary data released by the Cabinet Office revealed that Japan's real gross domestic product contracted by an unexpectedly high 0.2% in the first quarter of the year, marking the first decline in economic activity in twelve months.

A 2.3% annual contraction in exports was observed, with consumer expenditure stagnating even as capital investment experienced a 5.8% expansion.

Trump's tariffs are poised to adversely affect Japan's major exporters, particularly its automotive industry, impacting products originating not only from Japan itself, but also those sourced from countries like Mexico and Canada; policymakers concede that formulating an effective response presents a considerable challenge, given the President's unpredictable policy shifts.

S&P Global Ratings cautioned in a recent report that regional automakers confront escalating operational expenditures and prospective earnings shortfalls, primarily due to their reliance on geographically dispersed production facilities and intricate supply networks to sustain U.S. sales.

The report cautioned that even businesses with negligible U.S. sales may experience consequential, albeit indirect, repercussions as tariffs disrupt the global economy and depress consumer spending.

Japan's protracted economic malaise stems from flagging demand, exacerbated by its demographic shift towards an ageing and shrinking population characterized by increasing rates of singlehood and declining birth rates.

The Bank of Japan, having maintained a near-zero or negative interest rate environment for an extended period, has commenced a measured ascent in its benchmark rate, citing resilient wage growth and a progressive uptrend in prices.

The recent data, underscoring the precariousness of the economic climate, significantly increases the probability that the central bank will refrain from implementing additional interest rate increases.

Certain analysts are currently championing a reduction in the 10% consumption tax – analogous to sales taxes levied elsewhere – as a means of mitigating the financial strain experienced by many.

However, Prime Minister Shigeru Ishiba has yet to declare his support for 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.