Japan’s economy shrinks for the first time in a year and shows vulnerabilities – observer

Japan’s economy first shrunk in a year, illustrating its vulnerability, even before the impact of US President Donald Trump’s tariff measures.

The gross domestic product (GDP) adjusted by inflation registered a contraction of 0.7% in the first three months of the year, on an annualized base, according to a report by the Japanese government released on Friday.

The result was slightly weaker than the median of estimates of economists, who pointed to a contraction of 0.3%and leaves the economy at risk of falling in a technical recession in the ranking quarter, depending on the impact of United States customs rates.

The fall in exports and the increase in imports caused net trade to weigh on the economy in the first three months of the year after a strong boost in the previous quarter.

Consumer expenses, which represent about half of the economy, remained virtually unchanged. Consumption remained below its pre-standard level, influenced by the effect of inflation and consequent reduction of purchasing power.

The first contraction during the term of Prime Minister Shigeru Ishiba Increases concerns about the resilience of the Japanese economy before the entry into force of Trump tariffs in the ongoing quarter.

The weakness of the economy reinforces, on the other hand, the idea that the Bank of Japan (Boj) should take a break from the rateswhile monitoring the potential impact of rates after halving their growth forecast for this year earlier this month.

Contraction should also feed the ongoing political debate on the need for tax reductions or monetary aid before elections to the upper summer of Parliament. Ishiba’s approval rate remains under pressure on local polls, having reached the lowest level of his term this month.

The cost of living has been increasing much above the 2% goal set by Boj for this year, driven by a leap in food inflation. The price of rice, the basic food of the nation, continued to rise in March, increasing 92% over the anterior yearr. This forced some public schools to reduce the number of lunches with the cereal from three to two a week, according to NHK public broadcaster.

While families await lower inflation and an increase in real wages, Honda Motor Co. has reduced its profit forecast for this fiscal year due to US customs rights. This measure was followed by a reduction made by Toyota Motor Corp.

These are worrying signs for political decision makers, as Japan’s largest companies have given the motto for wage negotiations that have resulted in the biggest increases in the last three decades in the last two years.

The first salary of US tariff measures came in March, when Donald Trump imposed a 25% rate on steel and aluminum imports. The same rate was applied to cars in April, along with a 10% universal tariff over Japanese products, which will increase to 24% within a few months if there is no commercial agreement.

Japan has recorded a few progress in commercial negotiations, although Treasury Secretary Scott Bessent suggested last month that negotiations with the country would be priority.

While Washington has reached an agreement with the UK and woke up a temporary truce with China, the Secretary of Commerce, Howard Lutnick, said earlier this month that it would be necessary “a lot of time” to reach an agreement with Tokyo.

Japan follows the United States, registering negative growth in the first quarter. With one projected potential growth rate of about 0.6%the lowest among the countries of the seven (G7) largest economies in the world, the Japanese economy recorded at least a quarterly contraction in every year since the pandemic.