 "Japan’s economy contracts fuelling recession risks, but it was shrinking even before Trump tariffs")
Japan’s economy contracted for the first time in a year, highlighting its fragility even before feeling the full impact of US President Donald Trump’s tariff policies.
According to a Bloomberg report, citing a report by the Cabinet Office released on Friday, inflation-adjusted GDP fell by 0.7% on an annualised basis in the first quarter.
The decline was steeper than economists’ median forecast of a 0.3% contraction, raising the risk of a technical recession if further pressure from US tariffs materialises this quarter, added the report.
Weaker exports and a surge in imports dragged down net trade, reversing the strong contribution it made in the previous quarter. Meanwhile, consumer spending — which makes up about half of Japan’s economy — remained mostly flat.
Consumer spending remains below pre-pandemic levels as rising inflation erodes purchasing power.
The latest economic contraction, the first under Prime Minister Shigeru Ishiba, has deepened concerns about Japan’s economic resilience, even before the full impact of President Trump’s tariffs takes effect this quarter. The downturn adds weight to calls for the Bank of Japan to pause its rate hikes, especially after it cut its growth forecast for the year earlier this month, reported Bloomberg.
The report further said that the slump is also likely to intensify political debate over potential tax cuts or direct cash handouts ahead of the upper house election this summer.
Impact Shorts
More ShortsIshiba’s approval ratings have continued to slide, reaching a new low this month.
“This shows how easily Japan’s economy can fall into contraction because its growth potential is low,” Bloomberg quoted Taro Saito, head of economic research at NLI Research Institute, as saying as he flagged a high risk that the economy will shrink again this quarter.
“While there’s no tangible impact of the US tariffs in this data, that will kick in from this quarter. Exports will go down and capital spending will slow because of concerns for outlook,” Taro added.
Japan’s cost of living continues to climb well above the Bank of Japan’s 2% target, driven largely by food inflation.
According to the report, citing NHK, rice prices surged 92% in March year-on-year, prompting some public schools to cut rice-based lunches from three to two per week.
Households still await relief through lower inflation and real wage gains, but pressure is mounting. Honda slashed its profit forecast this week due to new US tariffs, following a similar move by Toyota — worrying signs as these firms have shaped wage hikes in recent years, reported Bloomberg.
Trump’s tariffs began in March with a 25% duty on steel and aluminum, expanded in April to autos, and now include a 10% levy on all Japanese goods, set to rise to 24% unless a deal is reached. Yet trade talks with Washington have stalled, even as the US advances deals with the UK and China.
Japan now joins the US in posting negative first-quarter growth. With a potential growth rate of just 0.6%, the lowest in the G7, Japan has suffered at least one quarterly contraction every year since the pandemic.
With inputs from agencies
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