Official figures released on Friday revealed a 0.7% annualized contraction in Japan's economy during the first quarter, attributed to the impact of U.S. President Donald Trump's trade disputes, which hampered export activity and undermined consumer sentiment.

Preliminary, seasonally adjusted Cabinet Office data revealed an unanticipated 0.2% contraction in Japan's real gross domestic product for the January-March period, marking the first decline in a year and reflecting a decrease in the nation's output of goods and services compared to the preceding quarter.

A 2.3% annual contraction in exports was observed, with consumer spending stagnating even as capital investment demonstrated a 5.8% expansion.

Trump's tariffs are poised to adversely affect Japan's major exporters, particularly in the automotive sector, impacting not only goods originating in Japan but also those sourced from countries such as Mexico and Canada; officials concede that formulating a coherent response is proving problematic given the US President's unpredictable policy shifts.

S&P Global Ratings cautioned that regional automakers are confronting escalating operational expenditures and possible revenue shortfalls, given their reliance on geographically dispersed production facilities and intricate supply networks for US sales.

The report cautioned that even businesses with negligible U.S. sales could experience significant knock-on effects, as tariffs reverberate through the global economy and dampen consumer appetite.

The Japanese economy has faced persistent headwinds for years, primarily due to flagging domestic demand exacerbated by demographic shifts, including an ageing and shrinking population coupled with declining marriage and birth rates.

Having maintained a near-zero interest rate policy for an extended period, the Bank of Japan has incrementally increased its benchmark rate, citing sustained wage levels and a moderate rise in prices as justification.

Recent findings, underscoring the precarious state of the economy, heighten the probability that the central bank will refrain from implementing further interest rate increases.

Certain analysts are now championing a reduction in the 10% consumption tax – analogous to sales taxes levied elsewhere – as a means of mitigating the financial strain experienced by many.

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 expenditure.

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