Japan Faces Deeper Economic Contraction Ahead of Trump Tariffs

US tariffs cause Japan’s economy to contract—this warning has come to pass. Japan has been facing economic contraction more quickly than anticipated in the March quarter, marking the country’s first contraction in a year. Flat consumer spending and dwindling exports were the main causes of the 0.7% annual GDP decline. The contraction occurs just prior to the impact of the high tariffs imposed by US President Donald Trump on Japanese goods.

With car exports subjected to a 24% tariff, Japan’s vital industries now lie under significant strain. Despite robust capital spending and a rewritten 2.4% quarter-on-quarter expansion in the previous quarter, Japan’s conditional recovery is at risk from Trump’s tariff-driven global trade disruption.

Exports Stumble as Consumption Slows

GDP in real terms contracted by 0.2% from the last quarter, more severely than the predicted 0.1% decline. Private spending, which accounts for over half the economy, was steady while expectations were of a modest increase.

The GDP deflator increased 3.3%, indicating that companies attempted to pass on increasing cost of inputs. External demand, though, weighed down GDP by 0.8 percentage points, with exports declining 0.6% while imports increased 2.9%. These are statistics prior to even the actual imposition of U.S. tariffs, highlighting initial cracks.

Trump Tariffs Cast Long Shadow

Trump‘s April 2 trade action created shockwaves in the entire economy of Japan. His administration slapped 10% tariffs on nearly all nations, except China, Canada, and Mexico. Japan will have to pay a 24% tariff on cars beginning July, unless it reaches a bilateral agreement with Washington. The U.S. has already imposed 25% tariffs on steel, aluminum, and automobiles.

This strikes Japan where it hurts the most—automobile exports. Japanese automobile companies are anticipating the impact. Toyota anticipates a 20% decline in profits. Mazda delayed its earnings prediction because of the uncertainty.

Policymakers Brace for Impact

Japan’s Minister of Economic Revitalisation Ryosei Akazawa cited robust corporate pay rises as a cushion. However, he cautioned against severe downside risks from Trump’s trade tariffs and inflation. Experts concur. Dai-ichi Life Research’s Yoshiki Shinke described Japan’s economy as “shock-prone” without a solid growth driver. Moody’s Analytics’ Stefan Angrick noted the initial contraction in a sign of “weak domestic momentum.

The GDP decline would pressure Prime Minister Shigeru Ishiba to plan fresh stimulus or tax cuts. No such proposals are currently in the works, but there is growing political pressure. The Bank of Japan is taking a careful approach. It hiked rates to 0.5% in January but reduced its growth forecast, citing tariff threats, recently. If U.S. tariffs take a bigger bite, the BOJ could suspend further rate hikes this year.

Uncertain as Trade Talks Loom

Japan’s future is now riding on trade negotiations with the U.S. Policymakers are trying to stave off the worst, but danger is still lurking. If tariffs derail capital expenditure and exports further, the economy might shrink again in the second quarter.

Japan’s tenuous recovery is in limbo for now—stuck between an anaemic domestic foundation and Trump’s belligerent trade agenda.