Japan's GDP Experiences First Contraction In A Year Due To Weak Domestic Demand

Japan's economy contracted by an annualised 0.7% in the first quarter of 2025, marking its first decline in a year. Government data revealed that domestic demand was weak even before the full impact of increased U.S. tariffs. The real GDP, adjusted for inflation, fell by 0.2% from the previous quarter, as consumer spending struggled amid rising inflation and higher import costs.

In April, U.S. President Donald Trump imposed significant tariffs on Japanese goods, raising concerns about potential negative effects on Japan's export-reliant economy. This move could further dampen household and corporate confidence. The Japanese government is now working on an economic package to mitigate these impacts ahead of the upcoming House of Councillors election this summer.

Private consumption, which makes up over half of Japan's economy, saw a slight increase of 0.04% for the fourth consecutive quarter. However, inflation continued to surpass wage growth, limiting consumer spending power. Exports dropped by 0.6%, marking their first decline in four quarters due to reduced charges for intellectual property rights and research services.

Imports grew by 2.9%, negatively affecting GDP growth, driven by aircraft purchases and online advertising payments. Capital investment rose by 1.4%, continuing its upward trend for the fourth straight quarter. This increase was supported by demand for semiconductor equipment and technologies addressing labour shortages.

The nominal GDP saw a rise of 0.8% from the previous quarter or an annualised rate of 3.1%. Prime Minister Shigeru Ishiba's minority government is focusing on strategies to counteract inflationary pressures and U.S.-imposed tariffs to stabilise the economy.

The recent economic data highlights challenges faced by Japan as it navigates external pressures and internal economic dynamics. The government's efforts to compile supportive measures are crucial in maintaining stability during this period of uncertainty.

With inputs from WAM