Official figures released on Friday revealed that the Japanese economy experienced a 0.7% annualised contraction in the first quarter, with economists attributing this decline to the impact of US President Donald Trump's trade disputes on export performance and a consequent weakening of consumer sentiment.

Japan's real gross domestic product contracted by an unanticipated 0.2% in the first quarter of the year, according to preliminary, seasonally adjusted Cabinet Office data, marking the first decline in a year.

Exports experienced a 2.3% annual contraction. Consumer expenditure stagnated, even as capital investment saw a 5.8% expansion.

Trump's imposition of tariffs threatens to significantly impact Japan's major exporters, particularly its automotive industry, affecting not just goods originating within Japan but also those sourced from countries like Mexico and Canada; policymakers concede that formulating a coherent response is proving difficult given the US President's unpredictable policy shifts.

S&P Global Ratings cautioned in a recent report that regional automakers, reliant on multifaceted production hubs and supply networks for their U.S. sales, are confronting escalating operational expenditures and the prospect of diminished revenues.

The report cautioned that even businesses with negligible U.S. sales could experience significant, albeit indirect, repercussions as tariffs reshape the global economic landscape and dampen consumer appetite.

The Japanese economy has faced persistent headwinds for years, hampered by flagging demand due to its demographic shift towards an ageing and shrinking population, exacerbated by increasing rates of singlehood and declining birth rates.

The Bank of Japan, long committed to a policy of zero or negative interest rates, has incrementally adjusted its benchmark rate upwards, citing sustained wage growth and a moderate increase in price levels.

The recent data, underscoring the precarious nature of the economic recovery, significantly increases the probability that the central bank will refrain from implementing additional interest rate increases.

Certain analysts are championing a reduction in the 10% consumption tax – analogous to sales tax in other countries – to ameliorate financial strain on individuals.

However, Prime Minister Shigeru Ishiba has yet to express his endorsement of the proposal, particularly given the considerable strain on Japan's national finances due to escalating social welfare expenditures.

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