New government figures show that the Japanese 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.

New data shows that Japan's economy, measured by its real gross domestic product, unexpectedly decreased by 0.2% in the first three months of the year. This is the first time it has shrunk in a year, according to early figures from the Cabinet Office.

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 major Japanese exporters, particularly car companies, affecting goods sent from Japan as well as 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 since their sales in the U.S. rely on different production sites and supply networks.

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

Japan's economy has faced challenges for some time, due to low demand caused by an aging and shrinking population, with more people choosing to remain single or have smaller families.

The Bank of Japan, known for its long-standing policy of near-zero interest rates, has started to slowly increase its main interest rate, pointing to stable salaries and a gradual rise in prices.

Recent research, suggesting the economy is still unstable, increases the chance that the central bank will avoid raising interest rates again soon.

Some experts suggest reducing the 10% consumption tax, similar to sales taxes in other countries, to ease financial difficulties for people.

However, Prime Minister Shigeru Ishiba has yet to declare his support for the plan, particularly as Japan's public finances are under pressure due to rising social welfare expenses.

The economy expanded at a rate of 2.4% annually in the final quarter of 2024.