Japan's economy shrank by 0.7% annually in the first quarter, official figures showed on Friday, with exports and consumer confidence suffering due to the trade tensions initiated by US President Donald Trump.

Japan's economy unexpectedly shrank by 0.2% in the first three months of the year, according to government figures. This decline in GDP, which measures the country's goods and services, is the first contraction in a year.

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 will probably harm Japan's major exporting companies, particularly car manufacturers. This is not just for goods sent from Japan, but also from countries like Mexico and Canada. Officials admit that creating a response is difficult because Trump frequently changes his plans.

"S&P Global Ratings reported that local car companies may struggle with higher costs and lower earnings, as their American sales rely on complex manufacturing and supply networks."

The report suggested that even companies with low U.S. sales might feel noticeable, though 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 or have fewer children.

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

Recent research suggests the economy is still weak, making it more probable the central bank will delay raising interest rates again.

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

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

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