New government figures show that the Japanese economy shrank by 0.7% in the first quarter of the year. This was partly due to a drop in exports and weaker consumer confidence, influenced by the trade war initiated by U.S. President Donald Trump.

New figures show that Japan's economy, measured by its real gross domestic product, unexpectedly fell by 0.2% between January and March compared to the previous three months. This is the first time it has shrunk in a year, according to early, seasonally adjusted data from the Cabinet Office.

Exports fell by 2.3% compared to last year. Consumer spending stayed the same, but investment in businesses increased by 5.8%.

Trump's tariffs could negatively affect Japan's major exporters, particularly car manufacturers, not just on goods exported from Japan, but also from countries like Mexico and Canada. Government 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 earnings, as their sales in the U.S. rely on different production sites and supply networks.

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

The Japanese economy has faced difficulties for years, mainly because demand is low as the population gets older and smaller, with more people choosing to remain single and have fewer children.

The Bank of Japan, known for its long period of near-zero interest rates, has started to slowly increase its key rate, pointing to stable wages and a gradual rise in prices.

Recent research, suggesting the economy is still weak, increases the chance that the central bank will avoid raising interest rates again.

Some experts suggest reducing the 10% consumption tax, similar to sales tax in other countries, to ease the difficulties people are facing.

However, Prime Minister Shigeru Ishiba has yet to confirm his support for this proposal, especially given the significant pressure on Japan's public finances due to rising social welfare expenses.

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