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

TOKYO – Japan’s economy shrank for the first time in a year in the March quarter at a faster pace than expected, data showed on May 16, underscoring the fragile nature of its recovery now under threat from US President Donald Trump’s trade policies.

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

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

The decline was due to stagnant private consumption and falling exports, suggesting the economy was losing support from overseas demand even before Mr Trump’s announcement on April 2 of sweeping “reciprocal” tariffs.

On a quarter-on-quarter basis, the economy shrank 0.2 per cent, compared with market forecasts for a 0.1 per cent contraction.

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 per cent gain.

Capital expenditure increased 1.4 per cent compared with market forecasts for a 0.8 per cent gain, the data showed.

External demand shaved 0.8 percentage point off GDP growth as exports fell 0.6 per cent, while imports rose 2.9 per cent. Domestic demand, by contrast, added 0.7 point to growth.

A global trade war touched off by US tariffs has jolted financial markets and complicated the Bank of Japan’s (BOJ) decision on when and how far it can push up interest rates.

Having exited a decade-long stimulus last year, the BOJ hiked rates to 0.5 per cent in January and has signaled its readiness to keep hiking borrowing costs if a moderate economic recovery keeps Japan on track to durably hit its 2 per cent inflation target.

But fears of a Trump-induced global slowdown forced the BOJ to sharply cut its growth forecasts at its April 30 to May 1 policy meeting, and cast doubt on its view that sustained wage hikes will underpin consumption and the broader economy.

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

The gloomy GDP data may also pile pressure on Japanese Prime Minister Shigeru Ishiba to heed lawmakers’ demands to cut tax or compile a fresh stimulus package. REUTERS

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