Japanese economy contracted at an annualized rate of 0.7% in the first quarter, according to governmental data released Friday, as President Trump's trade disputes took a toll on exports and dampened consumer confidence.

Preliminary, seasonally adjusted data released by the Cabinet Office indicates that Japan's real Gross Domestic Product (GDP), a key metric of national economic output, unexpectedly contracted by 0.2% in the first quarter of the year, representing the first decline in twelve months.

A 2.3% year-on-year contraction in exports was observed; however, consumer spending remained stable, offset by a 5.8% increase in capital investment.

Trump's tariffs risk negatively impacting major Japanese exporters, particularly automobile manufacturers, not only on products originating from Japan but also those from countries like Mexico and Canada; officials concede that contingency planning is proving challenging given the President's volatile decision-making.

S&P Global Ratings noted in a report that regional automotive manufacturers are confronting escalating operational expenditures and potential revenue shortfalls, as their U.S. sales are contingent upon a diversified manufacturing base and supply chain.

"The report indicated that even companies with minimal sales within the U.S. could experience substantial, albeit indirect, repercussions as tariffs influence the global economy and consumer demand."

Japan's economy has confronted persistent headwinds in recent years, hampered by flagging domestic demand as a consequence of its demographic shift towards an ageing and declining population, characterised by a growing prevalence of single-person households and diminished birth rates.

The Bank of Japan, after maintaining near-zero or negative interest rates for a prolonged period, has cautiously begun to adjust its benchmark rate, citing sustained wage growth and a gradual rise in prices as key factors influencing the decision.

The latest findings, seemingly underscoring the economy's vulnerability, significantly increase the likelihood of the Central Bank postponing further interest rate hikes.

Certain analysts advocate for a reduction in consumption tax, potentially to 10% aligning it with sales taxes levied in comparable nations, as a measure to alleviate financial strain on citizens.

However, Prime Minister Shigeru Ishiba has yet to voice his support for this proposal, particularly given the considerable strain on Japan's national finances due to escalating social security expenditures.

The economy experienced an annualized growth rate of 2.4% in the final quarter of 2024.