TOKYO – Japan’s economy unexpectedly shrank in the first quarter of 2025, spotlighting its shaky recovery as it braces for fallout from a potential trade war with the United States.
According to Channel News Asia, official data released Friday showed that real gross domestic product (GDP) declined at an annualized rate of 0.7% between January and March. The drop was far steeper than the 0.2% contraction forecast by economists and marks the country’s first economic pullback in a year.
Weaker household spending and falling exports weighed heavily on overall growth, revealing Japan’s continued reliance on overseas demand — a lifeline now threatened by U.S. President Donald Trump’s aggressive tariff plans. Just weeks earlier, Trump announced sweeping new trade duties set to target major U.S. partners, including Japan.
“Japan’s economy doesn’t currently have a strong growth engine,” said Yoshiki Shinke, senior economist at the Dai-ichi Life Research Institute. “It’s highly susceptible to external shocks, especially from U.S. trade moves.”
There were a few bright spots. Last quarter’s GDP was revised upward from 2.2% to 2.4%, and capital expenditure jumped 1.4%. But the overall outlook remains fragile. Domestic demand provided modest support, yet it failed to offset global uncertainty.
Private consumption — which accounts for more than half of Japan’s economy — was flat in Q1, missing the anticipated 0.1% rise. Exports dropped 0.6% while imports surged 2.9%, resulting in a 0.8 percentage point drag on GDP from external demand — and this before the full impact of U.S. tariffs has materialized.
Economic Revitalization Minister Ryosei Akazawa acknowledged the risks during a press briefing, noting that rising wages could offer some buffer. “But we must remain vigilant,” he warned, adding that U.S. tariffs and higher consumer prices could further dampen household confidence and delay recovery.
The GDP deflator — an inflation-adjusted growth measure — rose 3.3%, the second consecutive quarterly increase. The figure suggests businesses are passing increased costs onto consumers.
With the specter of U.S. tariffs looming, economists say Japan may face growing pressure to enact new fiscal stimulus to buffer the economy, especially if the downturn continues into the next quarter.
The concern is particularly acute for Japan’s export-heavy sectors, such as the automobile industry, which could suffer significantly if trade tensions with the United States escalate.
