Government figures released on Friday showed that the Japanese economy shrank by 0.7% annually in the first quarter, with experts suggesting that US trade policies and a drop in consumer confidence contributed to a fall in exports.

New data shows that Japan's economy, measured by its real gross domestic product, unexpectedly decreased by 0.2% between January and March. This is the first time it has shrunk in a year, according to a recent report from the Cabinet Office.

Exports fell by 2.3% compared to last year. Consumer spending didn't change much, but investment in businesses increased by 5.8%.

Trump's tariffs could negatively affect Japan's major exporting companies, particularly car manufacturers, impacting goods coming from Japan as well as those from countries like Mexico and Canada. Government officials admit that planning a response is difficult because Trump's policies are constantly changing.

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

The report stated that even companies with limited sales in the U.S. might experience significant indirect effects, as tariffs influence the global economy and consumer spending.

Japan's economy has faced difficulties for a long time, partly because fewer people are buying things as the population gets older and smaller, with more individuals choosing to remain single and have fewer children.

The Bank of Japan, which had kept interest rates near zero for a long time, has started to slowly increase them, pointing to stable salaries and rising prices.

Recent research, suggesting the economy is still weak, 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 the financial difficulties people are facing.

However, Prime Minister Shigeru Ishiba has yet to declare his support for the plan, as Japan's public finances are under significant pressure due to rising social welfare expenses.

The economy expanded at an annual rate of 2.4% in the final quarter of 2024.