Japan’s economy experienced its first quarterly contraction in a year from January to March, as preliminary data revealed on Friday. Analysts have cautioned that tariffs imposed by Donald Trump could lead to a recession unless a resolution is reached.
The economy contracted by 0.2% on a quarterly basis, exceeding expectations and potentially affecting Prime Minister Shigeru Ishiba before parliamentary elections in July, where voters are already discontented due to inflation and alleged corruption within the ruling party.
The figures, contrasting with the 0.6% growth in the last quarter of 2024, suggest that the Bank of Japan may delay its monetary tightening program. The previous contraction occurred in the first quarter of 2024, with a 0.4% decrease.
Annualized data indicated a 0.7% reduction in the economy during the first quarter. Experts had anticipated challenges for Japan due to the U.S. president’s trade policies affecting the global economy. Despite ongoing discussions between Tokyo and the White House to mitigate the impact, concerns remain.
BNP Paribas Chief Economist Ryutaro Kono commented on the heightened uncertainty due to Trump’s tariffs, predicting a clearer economic slowdown starting from the second quarter. Trump’s efforts to address what he considers unfair trade imbalances involve tariffs on imports such as steel and automobiles.
Japan’s economic difficulties extend beyond the trade conflict. With both domestic and foreign demand weakening, the economy lacks momentum, according to Yoshiki Shinke from the Dai-ichi Life Research Institute. He cautioned that the threat of a recession cannot be dismissed, depending on the impact of the tariff issue.
The data indicated a 0.6% decline in exports, a vital growth driver, while imports rose by 2.9%, affecting overall GDP. The Bank of Japan recently lowered its growth forecasts and maintained interest rates, citing trade tariffs as a source of global economic uncertainty.
Marcel Thieliant from Capital Economics noted that U.S. tariffs are likely to impede export growth, validating the Bank of Japan’s previous cautious economic outlook. He predicted that the bank might delay its tightening cycle longer than anticipated.
Stefan Angrick of Moody’s Analytics suggested that government policies might exacerbate the risks posed by U.S. tariffs. He pointed out that Ishiba’s administration has resisted economic fiscal support, a stance that appeared unsustainable even before the trade war escalation.
As public support wanes, a policy change may become necessary, though it could arrive too late to be effective. These developments occur as Ishiba prepares for Japan’s upper house parliamentary elections in two months.
His coalition lost its majority in the powerful lower house in October amid voter dissatisfaction with rising prices and political scandals, marking the Liberal Democratic Party’s worst election outcome in 15 years.
