New government figures show that Japan's economy shrank by 0.7% annually in the first quarter, as exports suffered from the effects of U.S. President Donald Trump's trade war, which also negatively impacted consumer confidence.

Japan's economy unexpectedly decreased by 0.2% in the first three months of the year, according to early government figures. This is the first time it has shrunk in a year, with a drop in the total value of goods and services produced.

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 will probably harm Japan's major exporters, particularly car manufacturers, affecting products shipped from Japan, as well as those 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 income, as their sales in the U.S. rely on different production sites and supply networks.

"The report suggested that even companies with small U.S. sales might feel noticeable effects, as tariffs influence the world economy and what people want to buy."

Japan's economy has faced challenges for a long time, partly because fewer people want to buy things as the population gets older and smaller, with more individuals choosing to remain single and have fewer children.

The Bank of Japan, known for its long-standing policy of near-zero interest rates, has started to cautiously increase its key rate, pointing to stable wages and a slow but steady rise in prices.

Recent data, suggesting the economy is still unstable, 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 financial difficulties faced by many people.

However, Prime Minister Shigeru Ishiba has yet to confirm his support for the plan, as Japan's public finances are currently facing significant pressure because of rising social welfare expenses.

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