Japan's economy shrinks more than expected as US tariff hit looms

Japan's economy shrinks more than expected as US tariff hit looms

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 U.S. President Donald Trump's trade policies.

The data highlights the challenge policymakers face as steep U.S. tariffs cloud the outlook for the export-heavy economy, particularly for the mainstay automobiles sector.

Real gross domestic product (GDP) contracted an annualized 0.7% in January-March, preliminary government data showed, much bigger than a median market forecast for a 0.2% drop. It followed a revised 2.4% increase in the previous quarter.

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% gain. External demand, or net exports, shaved 0.8 percentage points off GDP growth, the data showed.

A global trade war touched off by Trump's sweeping tariffs has jolted financial markets and complicated the Bank of Japan's decision on when and how far it can push up interest rates.

While a de-escalation of U.S.-China trade tensions offered markets and policymakers some relief, there is uncertainty on whether Japan can win exemptions from U.S. tariffs in bilateral trade talks with Washington.