Japan’s economy shrank for the first time in a year in the March quarter, data showed on Friday, underscoring the fragile nature of its recovery now under threat from U.S. President Donald Trump’s trade policies. The data highlights the challenge policymakers face as steep U.S. tariffs cloud the outlook for the export-heavy economy, particularly for the mainstay automobiles sector.
Real gross domestic product (GDP) contracted an annualised 0.7% in January-March, preliminary government data showed, much bigger than a median market forecast for a 0.2% drop.It followed a revised 2.4% increase in the previous quarter. On a quarter-on-quarter basis, the economy shrank 0.2% compared with market forecasts for a 0.1% contraction.
Private consumption, which accounts for more than half of Japan’s economic output, was flat in the first quarter, compared with market forecasts for a 0.1% gain. Capital expenditure increased 1.4% compared with market forecasts for a 0.8% gain, the data showed. External demand, or net exports, shaved 0.8 percentage point off GDP growth, the data showed. Analysts polled by Reuters expected external demand, or shipments minus imports, to have shaved 0.6 point off GDP growth.
A global trade war touched off by Trump’s sweeping tariffs has jolted financial markets and complicated the Bank of Japan’s decision on when and how far it can push up interest rates.Having exited a decade-long stimulus last year, the BOJ hiked rates to 0.5% in January and has signaled its readiness to keep hiking borrowing costs if a moderate economic recovery keeps Japan on track to durably hit its 2% inflation target.
But fears of a Trump-induced global slowdown forced the BOJ to sharply cut its growth forecasts at its April 30-May 1 policy meeting, and cast doubt on its view that sustained wage hikes will underpin consumption and the broader economy. While a de-escalation of U.S.-China trade tensions offered markets and policymakers some relief, there is uncertainty on whether Japan can win exemptions from U.S. tariffs in bilateral trade talks with Washington. The gloomy GDP data may also pile pressure on Prime Minister Shigeru Ishiba to heed lawmakers’ demands to cut tax or compile a fresh stimulus package.