TOKYO: Japan’s economy shrank for the first time in a year in the March quarter at a faster pace than expected, data showed on Friday (May 16), underscoring the fragile nature of its recovery now under threat from United States President Donald Trump’s trade policies.
The data highlights the challenge policymakers face as steep US tariffs cloud the outlook for the export-heavy economy, particularly for the mainstay automobile sector.
Real gross domestic product (GDP) contracted an annualised 0.7 per cent in January to March, preliminary government data showed, much bigger than a median market forecast for a 0.2 per cent drop.
The decline was due to stagnant private consumption and falling exports, suggesting the economy was losing support from overseas demand even before Trump’s announcement on Apr 2 of sweeping “reciprocal” tariffs.
The data did highlight some brighter aspects, which included GDP growth being revised up slightly to 2.4 per cent from 2.2 per cent for the final quarter of last year.
Capital expenditure rose a faster-than-expected 1.4 per cent, helping domestic demand add 0.7 percentage point to GDP growth.
Overall, however, analysts were cautious about the softer demand impulse and risks to the outlook from a Trump-led change to the global trade order.
“Japan’s economy lacks a driver of growth, given weakness in exports and consumption. It’s very vulnerable to shocks such as one from Trump tariffs,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute.
“The data may lead to growing calls for bigger fiscal spending,” he said, adding the economy could contract again in the second quarter depending on when the hit from tariffs intensifies.
On a quarter-on-quarter basis, the economy shrank 0.2 per cent compared with market forecasts for a 0.1 per cent contraction.
TARIFF RISKS
Japan’s Economic Revitalisation Minister Ryosei Akazawa said big pay hikes offered by companies will likely underpin a moderate economic recovery, but warned of risks to the outlook.
“We must be mindful of downside risks to the economy from US tariff policy. The hit to consumption and household sentiment from continued price rises is also a risk to growth,” Akazawa told a news conference after the GDP data.
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 per cent gain.
The GDP deflator, which shows the extent to which firms can pass on rising costs, rose 3.3 per cent in January to March from year-before levels, accelerating for the second straight quarter.
But external demand shaved 0.8 percentage point off GDP growth as exports fell 0.6 per cent, while imports rose 2.9 per cent, even before the impact of Trump tariffs begins to materialise in full force.
