Official figures released on Friday revealed that the Japanese economy shrank by 0.7% annually in the first quarter, with exports suffering from the impact of US President Donald Trump's trade disputes and a consequent decline in consumer confidence.

Preliminary data from Japan's Cabinet Office revealed an unexpected 0.2% contraction in real gross domestic product during the first quarter of the year, marking the first decline in economic output in twelve months.

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

Trump's imposition of tariffs threatens to significantly impact Japan's major exporters, particularly its automotive industry, affecting not only goods directly exported from Japan but also those sourced from countries like Mexico and Canada; officials concede that formulating a coherent response is proving problematic given the unpredictable nature of Trump's policy shifts.

S&P Global Ratings indicated in a report that regional automakers are confronting escalating operational expenditures and possible revenue shortfalls, given their reliance on varied production infrastructures and supply networks for U.S. sales.

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.

Japan's protracted economic malaise stems from chronically weak demand, exacerbated by demographic shifts including an ageing and shrinking population coupled with declining marriage and birth rates.

The Bank of Japan, having maintained a near-zero or negative interest rate policy for an extended period, has commenced a measured increase of its benchmark rate, citing sustained wage levels and a gradual upward trend in prices.

Recent findings, underscoring the precarious nature of the economy, significantly increase the probability of the central bank maintaining its current interest rate policy.

Certain analysts are now championing a reduction in the 10% consumption tax – analogous to sales taxes elsewhere – to mitigate the financial strain on households.

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

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