New government figures show that Japan's economy shrank by 0.7% annually in the first quarter, as exports suffered from the effects of U.S. President Donald Trump's trade war, which also negatively impacted consumer confidence.

New data shows that Japan's economy, measured by its real gross domestic product, unexpectedly decreased by 0.2% between January and March compared to the previous three months, according to government figures. This is the first time it has shrunk in a year.

Exports saw a yearly drop of 2.3%. Consumer spending didn't change much, but investment in capital increased by 5.8%.

Trump's tariffs will probably harm major Japanese exporters, particularly car manufacturers, affecting products shipped from Japan as well as those from countries like Mexico and Canada. Officials admit that planning a response is difficult because Trump frequently changes his decisions.

According to a report by S&P Global Ratings, local car manufacturers may struggle with higher costs and lower income, as their sales in the U.S. rely on varied production sites and supply networks.

The report suggested that even companies with small sales in the U.S. might feel noticeable, though indirect, effects as tariffs influence the world economy and what people want to buy.

Japan's economy has faced challenges for some time, due to low demand caused by its ageing and shrinking population, with more people remaining single and having fewer children.

The Bank of Japan, which has maintained very low interest rates for a long time, has started to slowly increase them, pointing to stable salaries and a gradual rise in prices.

New data suggesting the economy is unstable increases the chance that the central bank will delay raising interest rates again.

Some experts suggest reducing the 10% consumption tax, like a sales tax, to ease financial difficulties for people.

However, Prime Minister Shigeru Ishiba has yet to confirm his support for the plan, as Japan's public finances are currently facing significant challenges due to rising social security expenses.

The economy expanded at a rate of 2.4% annually in the final quarter of 2024.