Japan's economy experienced a greater-than-anticipated contraction in the first quarter of 2025, according to official data for January to March. The Gross Domestic Product (GDP) shrank by 0.2% compared to the previous quarter, marking the first quarterly drop since the January-March period in 2024. Year-on-year, Japan's economy contracted by 0.7%, significantly exceeding the forecast 0.2% contraction.

The economic downturn was largely attributed to declining exports, a key driver of the Japanese economy. Data indicated weakening demand for exports even before the announcement of sweeping tariffs by US President Donald Trump. On April 2, the US imposed a 24% tariff on Japanese goods, along with an additional 25% levy on cars. The US represents the largest market for Japan's automotive industry. These tariffs are scheduled to take effect in July, pending a negotiated deal between the two countries.

Ryutaro Kono, chief economist at BNP Paribas, noted that the Trump tariffs have greatly heightened uncertainty, suggesting that the economic slowdown trend is likely to become more apparent from the second quarter onward. Tokyo has been engaged in efforts to negotiate a trade deal with the US; however, policymakers have acknowledged the difficulty in planning a response due to Trump's shifting positions.

Japan's economy has faced ongoing vulnerabilities, including an aging population that is increasing welfare spending while limiting labor and demand. The Japanese central bank had previously maintained a policy of negative interest rates to stimulate the economy but began to gradually raise rates in the past year.

Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, stated that Japan's economy lacks a growth driver due to weaknesses in exports and consumption, making it susceptible to shocks like the Trump tariffs. Shinke suggested that the economic data may lead to increased calls for greater fiscal spending and added that the possibility of the economy entering a recession cannot be ruled out, depending on the downward pressure resulting from the tariff issue.