Japan’s economy shrank by 0.2% in the first quarter of 2025, marking the country’s first quarterly contraction in a year and a sharper decline than economists had anticipated.

Compared with the same period in 2024, the economy contracted by 0.7%, far steeper than the 0.2% drop forecast by analysts. The decline was primarily driven by a fall in exports—a key engine of Japan’s economic growth.

Preliminary government data released Friday showed that real gross domestic product (GDP) contracted at an annualized rate of 0.7% between January and March, significantly missing market expectations.

The slump comes amid waning global demand and ahead of a fresh wave of U.S. trade tariffs. Data suggests export demand was already weakening before the Trump administration announced a 24% tariff and an additional 25% levy on Japanese automobiles. The United States remains Japan’s largest car export market.

Economists say stagnant private consumption also contributed to the downturn, raising concerns that the economy was already losing steam before Trump’s April 2 unveiling of sweeping “reciprocal” tariffs on trade partners, including Japan.

Despite the gloomy headline figures, some bright spots emerged in the data. GDP growth for the final quarter of 2024 was revised upward to 2.4% from an initial estimate of 2.2%. Capital expenditure also exceeded expectations, rising 1.4% and adding 0.7 percentage point to domestic demand.

Still, analysts warned that the outlook remains fragile as Japan grapples with weak consumption and heightened trade uncertainty.

“Japan’s economy lacks a growth driver given the weakness in exports and consumption. It is highly vulnerable to shocks such as the Trump tariffs,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute.

Shinke added that the latest data could fuel calls for stronger fiscal stimulus, warning that the economy could slip into another contraction in the second quarter if the impact of U.S. tariffs begins to bite more deeply.

• Reuters