New government figures released on Friday show that Japan's economy shrank by 0.7% annually in the first quarter of the year. This decline was caused by Donald Trump's trade war, which negatively impacted exports and consumer confidence.

According to preliminary, seasonally adjusted data from the Cabinet Office, the real Gross Domestic Product (GDP) fell by 0.2% from January to March, a larger drop than expected and the first contraction in a year.

Exports decreased by 2.3% annually, while personal spending remained the same. However, business investment increased by 5.8%.

President Trump's tariffs could significantly affect major Japanese exporters, especially car manufacturers, both on products shipped from Japan and those from other countries like Mexico and Canada. Sources say that Trump's frequent policy changes make it hard to create effective responses.

S&P Global Ratings stated in a report that "regional carmakers face higher operating costs and potential profit losses because their US sales rely on diverse production sites and supply chains."

The report also noted that "even companies with very few sales in the US could be significantly affected indirectly, as tariffs impact the global economy and consumer demand."

Japan's economy has struggled for many years, dealing with an aging and shrinking population, as well as low demand due to more single people and a declining birth rate.

The Bank of Japan, which has kept interest rates at zero or negative for a long time, has been gradually increasing its base interest rate, based on observations that wages are stable and prices are slowly rising.

These latest figures highlight the economy's fragility, likely discouraging the central bank from raising interest rates further.

Some analysts suggest lowering the 10% consumption tax, similar to sales taxes in other countries, to ease the public's financial difficulties.

However, Prime Minister Shigeru Ishiba has so far not indicated support for this idea. Japan's national finances are under severe strain due to rising social welfare costs.

In the final quarter of 2024, the economy had grown at an annual rate of 2.4%.