Japan’s Economy Contracts for First Time in a Year as Exports Decline

Japan’s economy shrank for the first time in a year, contracting 0.2% in the March quarter due to a drop in exports, according to preliminary data released by the government on Friday.

The contraction was sharper than the 0.1% decline forecast by economists in a Reuters poll. On an annualized basis, gross domestic product (GDP) fell 0.7%, exceeding the expected 0.2% drop.

Exports declined 0.6% quarter-on-quarter, subtracting 0.8 percentage points from overall GDP. The fall comes amid uncertainty linked to U.S. trade policies, which have weighed on Japan’s export-driven economy.

Despite the quarterly dip, Japan’s GDP rose 1.7% year-on-year — the largest annual increase since Q1 2023 and stronger than the 1.3% growth in the previous quarter.

The data comes as Japan remains in ongoing trade talks with the United States. So far, discussions have not led to a concrete agreement. Japan’s top trade negotiator, Ryosei Akazawa, said U.S. tariffs had no direct effect on Q1 GDP but warned of future downside risks.

“The government will take all necessary steps to support affected firms,” Akazawa said.

Domestic demand grew by 0.6% during the quarter. Krishna Bhimavarapu, Asia-Pacific economist at State Street Global Advisors, described this as a “bright spot” and expects a trade deal with the U.S. in the coming months to ease pressure.

The Bank of Japan held its policy rate at 0.5% during its May 1 meeting. On May 13, the central bank warned that economic growth could moderate due to global trade tensions, lower exports, and weaker business investment.

While inflation has stayed above the BOJ’s 2% target for three consecutive years — most recently at 3.6% in April — the bank signaled it would continue adjusting policy as necessary depending on economic conditions.