Japan’s economy contracted by 0.2% in the first quarter of 2025, with a 0.7% drop compared to the same period last year, worse than expected. The decline was driven mainly by falling exports, worsened by upcoming US tariffs on Japanese goods and cars. Japan’s aging population and rising welfare costs add to economic challenges. Experts warn the risk of recession remains if fiscal support is not increased.

Japan’s economy contracted at a higher pace than expected in the first quarter of 2025, according to official data for the January to March period released on Friday.

Japan's Gross Domestic Product (GDP) contracted by 0.2% compared to the previous quarter, marking the first quarterly drop since the January-March period in 2024.

However, when compared with the same quarter in the previous year, Japan's economy shrank by 0.7%, a much steeper decline than the forecasted 0.2% contraction.

The decline was largely driven by a fall in exports, which play a crucial role in supporting the Japanese economy. Data indicates that demand for exports was already waning even before US President Donald Trump announced sweeping tariffs.

On April 2, the US imposed a 24% tariff on Japanese goods, along with an additional 25% levy on cars. The US remains the largest market for Japan's automobile industry.

After an initial reprieve, these tariffs are scheduled to take effect in July unless Japan successfully negotiates a deal.

"Uncertainty is greatly heightened by the Trump tariffs, and it is likely that the economic slowdown trend will become clearer from (the second quarter) onward," BNP Paribas chief economist Ryutaro Kono told AFP news agency.

Tokyo has been actively trying to negotiate a trade deal with the US, but policymakers acknowledge that planning a response has been difficult due to Trump's frequent changes in position.

Japan's economy has been vulnerable for some time, as an aging population increases welfare spending while simultaneously limiting labor supply and domestic demand.

The Japanese central bank had maintained a policy of negative interest rates for a prolonged period to stimulate the economy but began gradually raising rates last year.

"Japan's economy lacks a driver of growth given weakness in exports and consumption. It's very vulnerable to shocks such as one from Trump tariffs," said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, in an interview with Reuters news agency.

He added, "The data may lead to growing calls for bigger fiscal spending," and cautioned that "the possibility of the economy entering a recession cannot be ruled out, depending on the degree of downward pressure caused by the tariff issue."