Official figures released on Friday revealed a 0.7% annualized contraction in the Japanese economy during the first quarter, attributed to the impact of then-President Trump's trade disputes on export performance and a subsequent decline in consumer sentiment.

Preliminary data from Japan's Cabinet Office revealed a steeper-than-anticipated 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% annualized contraction in exports was observed, with consumer expenditure stagnating even as capital investment expanded by 5.8%.

Trump's tariffs threaten to detrimentally impact Japan's major exporters, particularly the automotive sector, affecting not only goods originating in Japan but also those sourced from nations such as Mexico and Canada; officials concede that formulating a coherent response remains problematic given the US President's capricious policy shifts.

S&P Global Ratings cautioned in a recent report that regional automakers are confronting escalating operational expenditures and the risk of diminished revenues, primarily due to their reliance on geographically dispersed production facilities and intricate supply networks for their U.S. sales.

The report indicated that even businesses with negligible U.S. sales could experience significant, albeit indirect, repercussions as tariffs exert influence on the global economy and, consequently, consumer spending habits.

Japan's protracted economic malaise stems from flagging domestic demand, a consequence of its demographic shift towards an ageing and shrinking population characterised by increasing rates of single households and declining birth rates.

Having maintained a zero or negative interest rate policy for an extended period, the Bank of Japan has incrementally adjusted its benchmark rate upwards, citing sustained wage levels and a moderate increase in prices as justification.

The recent data, underscoring the precariousness of the economic climate, substantially increases the probability of the central bank refraining from additional interest rate increases.

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

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

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