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Investing.com-- Japan’s economy shrank much more than expected in the first quarter of 2025, as the country’s key exports slid amid tariff-related disruptions in global trade, while private consumption remained weak.
GDP fell 0.7% year-on-year, government data showed on Friday. The reading was weaker than expectations for a drop of 0.2% and a stark reversal from the 2.4% growth seen in the prior quarter.
Quarter-on-quarter, GDP fell 0.2% against expectations for a drop of 0.1%.
External demand as a component of GDP was the biggest weight on overall growth, falling 0.8% q-o-q, more than expectations for a drop of 0.6%.
The reading pointed to weakness in Japanese exports during the quarter, amid uncertainty over U.S. trade tariffs and weakening demand in major markets such as China.
U.S. President Donald Trump had begun enacting his tariff agenda in the latter part of the quarter, having imposed a universal 10% tariff on all imports, as well as steep levies on foreign automobiles and select commodities.
A strong yen also weighed on exports, as a hawkish Bank of Japan and increased safe haven demand boosted the currency.
Private consumption as a component of GDP was flat q-o-q, missing expectations for a 0.1% increase. Consumption has been cooling steadily since mid-2024, as the effects of bumper wage hikes began to peter out. But recent springtime labor negotiations yielded another round of wage hikes for 2025, which is likely to boost private spending in the near-term.
Capital expenditure was a sole bright spot in the Q1 GDP, rising 1.4% q-o-q, beating expectations of 0.8%.
Friday’s reading indicated that the Japanese economy was cooling after a moderately strong 2024. Softer domestic growth is likely to give the Bank of Japan less headroom to raise interest rates.
But inflation remained sticky during the quarter, with the GDP price index rising 3.2% y-o-y, in line with expectations.