Japan’s economy contracts for first time in a year as exports fall, shrinking by a more than expected 0.2%
On an annualized basis, Japan's GDP contracted 0.7% in the first quarter, also more than the 0.2% fall expected by the Reuters poll.
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Commercial and residential buildings at dusk in the Minato district of Tokyo, Japan.
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Japan's economy shrank for the first time in a year, contracting 0.2% in the March quarter as exports declined sharply, preliminary government data showed Friday.
The gross domestic product data was poorer compared to the 0.1% contraction expected by economists polled by Reuters.
On an annualized basis, Japan's GDP contracted 0.7% in the first quarter, also more than the 0.2% fall expected in the Reuters poll.
Exports fell 0.6% quarter-on-quarter, shedding 0.8 percentage points off the GDP as uncertainties caused by U.S. President Donald Trump's trade policies affected Japan's export-heavy economy. Domestic demand, however, was a bright spot, growing 0.6% in the same quarter and adding 0.7 percentage points to the GDP.
On a year-on-year basis, however, Japan's GDP expanded 1.7%, the largest expansion since the first quarter of 2023 and a stronger showing compared to the 1.3% growth seen in the fourth quarter.
Japan's GDP data comes at a time when the country is locked in trade negotiations with the U.S., with initial talks between both sides so far not yielding a conclusive deal.
Jesper Koll, expert director at financial services firm Monex Group, told CNBC that while Japanese companies are "very strong at home," reflecting the rise in domestic demand, exports may continue to see weakness.
He noted that even though the weak yen had given a competitive advantage for Japan's exports, the advantage was "overpowered" by China's machinery and tool exports, which have better after-sales compared to Japan and are of good quality.
On Friday, Japan's top trade negotiator, Ryosei Akazawa, reportedly said that there was no notable impact of U.S. tariffs on Japan's first-quarter GDP.
However, he warned of downside risks to the economy from U.S. trade policy and that the government would "take all necessary steps" to support impacted firms.
While improvements in jobs and wages would likely underpin a moderate economic recovery, Akazawa said that risks remained in consumer sentiment and consumption from sustained price hikes.
Krishna Bhimavarapu, Asia-Pacific Economist at State Street Global Advisors, said that while Japan's GDP growth figure was below his estimate, the domestic demand was "very good."
Bhimavarapu expects a "reasonable deal with the U.S." in the coming months, which will mitigate the tariff impact.
"All this will mean that the Bank of Japan will comfortably sit on the sidelines till certainty emerges as we expect just one hike this year, perhaps in Q4," he added.
The Bank of Japan held rates at 0.5% on May 1 for a second straight meeting.
The BOJ had also recently warned on May 13 that the country's economy is likely to moderate going forward, saying that this would be due to the effects of trade policies worldwide.
"Negative demand shocks are expected, including the impact of increased uncertainties on business fixed investment and household consumption, a decrease in the volume of exports to the United States and a deterioration in Japan's export profitability," the BOJ wrote.
U.S. tariff policy will exert downward pressure on both economic activity and prices in Japan, the central bank noted.
Despite these growth concerns, the central bank seems set to continue raising its policy rate, with some BOJ board members saying the bank's inflation target of 2% is likely to be realized, and it would continue to raise the policy rate if its outlook for economic activity and prices are achieved.
Inflation in Japan had surpassed the BOJ's 2% target for three straight years, coming in most recently at 3.6% in April.
Other board members, however, also warned that the outlook is uncertain, and that the bank should "examine the possibility of both upward and downward deviations from its outlook and conduct monetary policy as appropriate."
