Japan's economy contracted in Q1 for the first time in a year, while the full impact of Trump's tariffs has yet to be felt

The latest data shows that Japan's economy contracted more than expected in Q1. As the impact of US President Trump's tariff policies becomes more pronounced, Japan's economy is expected to face even greater headwinds in the future

. A report released by the Japanese government on Friday revealed that the country's economy contracted for the first time in a year in Q1. The economy contracted by 0.2% QoQ, compared to market expectations of a 0.1% contraction.

Real GDP contracted at an annualized rate of -0.7% in Q1, significantly worse than the median market forecast of -0.2%. GDP growth in the previous quarter was revised up to 2.4%

. The decline in Japan's economy was attributed to stagnant private consumption and falling exports. Private consumption, which accounts for more than half of Japan's economic output, remained flat in Q1, compared to market expectations of a 0.1% increase. Japanese exports fell by 0.6% in the quarter, while imports rose by 2.9%

. This suggests that Japan's economy had already lost support from overseas demand before Trump announced the full implementation of "reciprocal tariffs" on April 2

. This highlights the fragility of Japan's economic recovery and the challenges faced by monetary policy makers. The global trade war initiated by Trump has shaken financial markets and complicated the Bank of Japan's (BOJ) interest rate path

. The BOJ ended a decade-long monetary easing policy last year and raised interest rates to 0.5% in January this year, indicating that it was prepared to further raise borrowing costs if a mild economic recovery enabled Japan to achieve its 2% inflation target over the long term

. At its meeting on April 30 to May 1, the BOJ kept interest rates unchanged at 0.5% and significantly lowered its economic growth forecast. This suggests that uncertainties surrounding US tariffs and the threats facing Japan's economy may keep policy makers on the sidelines for some time

.Impact of tariff policies gradually emerging

The impact of Trump's tariff policies is expected to become more pronounced in the coming months

. Trump imposed a 24% reciprocal tariff rate on Japan in early April, which was then suspended for 90 days until early July. However, Japan still faces a base tariff rate of 10% and a 25% auto tariff, which took effect on April 3

. This poses a significant threat to Japan's economy, which is highly dependent on exports, with automobiles being a key export category and a pillar industry of Japan's economy

. Currently, there is still uncertainty over whether Japan will secure tariff exemptions in bilateral trade negotiations with the US.

According to media reports citing sources, Akizawa Ryosei, Japan's chief trade negotiator and Minister for Economic Revitalization, may head to Washington as early as next week to hold the third round of trade negotiations with the US.