According to government figures released on Friday, the Japanese economy shrank at an annual rate of 0.7% in the first quarter, as exports suffered from US President Donald Trump's trade war and consumer confidence weakened.

Japan's real Gross Domestic Product (GDP), a measure of a country's goods and services, shrank by a larger-than-expected 0.2% in the first quarter of the year (January-March) compared to the previous quarter, according to preliminary seasonally adjusted figures released by the Cabinet Office; this marks the first decline in a year.

Exports decreased by 2.3% annually, and while consumer spending stagnated, capital investment increased by 5.8%.

Trump's tariffs could seriously hurt major Japanese exporters, especially car companies, impacting not only goods shipped from Japan but also those made in countries like Mexico and Canada. Officials admit it's hard to plan a response, as Trump keeps changing his position.

S&P Global Ratings stated in a report that local car manufacturers in the US, relying on various production sites and supply chains, are likely to experience higher operating costs and potential profit losses.

He also added that "even businesses with very little sales within the United States could be significantly affected, directly or indirectly, by the impact of tariffs on the global economy and consumer demand."

Japan's economy has faced weak demand for several years, influenced by an aging and shrinking population alongside a growing trend of single-person households and declining birth rates.

Having kept interest rates at or below zero for many years, the Bank of Japan has gradually raised its benchmark interest rate, citing sustained wages and a slow but steady rise in prices.

The latest results highlight the economy's fragility, making it more likely that the central bank will hold off on further interest rate hikes.

Some analysts suggest lowering the 10% consumption tax, similar to sales taxes in other countries, to ease the financial burden on citizens.

However, Shigeru Ishiba has not yet expressed his support for this idea. Japan's national finances are under considerable strain due to rising social welfare costs.

In the final quarter of 2024, the economy grew at an annual rate of 2.4%.