According to data released by the government on Friday, the Japanese economy contracted at an annual rate of 0.7% in the first quarter, as President Donald Trump's trade war took a toll on exports and dampened consumer confidence.

According to preliminary, seasonally adjusted data from the Cabinet Office, Japan's real GDP – a key metric of the nation's goods and services output – contracted by 0.2% in the first quarter of the year compared to the previous quarter. This unexpected downturn marks the first contraction in a year, exceeding analysts' forecasts.

Exports contracted at an annual rate of 2.3%. Consumer spending remained static, while capital investment saw an uptick of 5.8%.

Trump's tariffs could significantly impact major Japanese exporters, particularly automakers, targeting not only goods shipped directly from Japan but also those originating from countries like Mexico and Canada. Officials concede that devising effective countermeasures presents a considerable challenge, given Trump's propensity for abrupt reversals in policy.

In a recent report, S&P Global Ratings cautioned that regional automotive manufacturers are facing the headwinds of escalating operational costs and potential revenue erosion, given their reliance on diversified production bases and intricate supply chains to underpin their U.S. sales.

The report further elucidates that even companies with relatively modest sales figures in the US market may experience significant, albeit indirect, repercussions due to the tariffs' impact on the global economy and consumer demand.

For years, the Japanese economy has languished, grappling with sluggish demand exacerbated by a confluence of factors, including an aging and shrinking population, a rise in single-person households, and a persistently low fertility rate.

After maintaining interest rates at or below zero for many years, the Bank of Japan has commenced a measured upward adjustment of its benchmark rate, citing persistent wage stability coupled with a gradual rise in prices.

Recent economic data underscore underlying vulnerabilities, leading to increased speculation that the central bank may pause its cycle of interest rate hikes.

Certain analysts advocate for a reduction of 10% in consumption taxes, akin to sales taxes in other nations, as a measure to alleviate financial strain on the populace.

However, to date, Shigeru Ishiba has not voiced his support for this proposal, especially as Japan's national finances are under considerable strain due to escalating social welfare expenditure.

In the final quarter of 2024, the economy expanded at an annualized rate of 2.4%.