Official figures released on Friday revealed that the Japanese economy shrank by 0.7% annually in the first quarter, with analysts attributing the downturn to the impact of US trade disputes under President Trump, which stifled exports and undermined consumer sentiment.

Seasonally adjusted preliminary data from the Cabinet Office revealed that Japan's real gross domestic product contracted by an unexpectedly sharp 0.2% in the first quarter of the year, marking the first decline in twelve months.

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

Trump's imposition of tariffs threatens to detrimentally impact Japan's major exporters, particularly its automotive industry, affecting not only exports originating in Japan but also those from countries such as Mexico and Canada; policymakers concede that formulating a coherent response is proving problematic due to 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 prospective revenue deficits, primarily due to their reliance on geographically dispersed production centers and intricate supply networks for U.S. sales.

The report cautioned that even companies with negligible U.S. sales could experience consequential, albeit indirect, repercussions as tariffs disrupt the global economy and depress consumer demand.

Japan's protracted economic malaise stems from a confluence of factors, principally flagging domestic demand exacerbated by demographic shifts, namely an ageing and shrinking population coupled with declining marriage and birth rates.

After maintaining a zero or negative interest rate policy for an extended period, the Bank of Japan has begun incrementally increasing its benchmark rate, citing sustained wage levels and a moderate rise in prices.

The recent data, underscoring the economy's precariousness, significantly increases the probability that the central bank will refrain from implementing additional interest rate increases.

Certain analysts are now championing a reduction in the 10% consumption tax – analogous to sales tax in many countries – as a measure to mitigate the financial strain on households.

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

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