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

Preliminary data revealed that Japan's real GDP, which reflects the country's goods and services, unexpectedly fell by 0.2% in the first quarter of the year, marking the first decline in a year.

Exports saw a yearly drop of 2.3%. Consumer spending stayed the same, but investment in capital increased by 5.8%.

Trump's tariffs could negatively affect Japan's major exporters, particularly car manufacturers, on products exported not just from Japan, but also from countries like Mexico and Canada. Government officials admit that creating a plan is difficult because Trump frequently changes his decisions.

"According to a report by S&P Global Ratings, regional car manufacturers are facing higher running costs and possible drops in income, as their sales in the U.S. rely on varied production locations and supply networks."

The report stated that even companies with small U.S. sales might experience significant, though indirect, effects as tariffs influence the global economy and consumer spending.

Japan's economy has faced challenges for a while, mainly due to low consumer demand as its population gets older and smaller, with more people choosing to remain single and have fewer children.

The Bank of Japan, which had kept interest rates near zero for a long time, has started to slowly increase them, pointing to stable wages and a gradual rise in prices.

Recent research, suggesting the economy is still weak, increases the chance that the central bank will pause raising interest rates.

Some experts suggest reducing the 10% consumption tax, like a sales tax, to ease the financial difficulties people are facing.

However, Prime Minister Shigeru Ishiba has not yet declared his support for this proposal, as Japan's public finances are facing considerable pressure due to rising social welfare expenses.

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