Japan's Q1 GDP shrinks amid US tariff uncertainty

Japan's GDP shrank by 0.2 percent on an annualized basis in the first quarter, marking its first contraction in four quarters amid growing uncertainty over US tariff policies.

The revised data, released by the Cabinet Office on Monday, showed an improvement from the initial estimate last month, which had pointed to a steeper 0.7 percent decline.

Private consumption, which accounts for more than half of Japan's economy, was revised upward from zero to a 0.1 percent gain. In addition, the contribution of private inventories to GDP growth was raised from 0.3 to 0.6 percentage points, driven by increased stockpiles of raw materials such as crude oil and natural gas.

Despite the upward revisions, the economy still recorded negative growth, underscoring the lack of momentum in Japan's recovery.

Amid uncertainty surrounding the United States' trade policy, particularly on tariffs, economists anticipate continued downward pressure on the Japanese economy, especially on exports. There are also concerns that capital investment could weaken as a result of rising uncertainty.

For the January-March period, private nonresidential investment was revised down from a 1.4 percent increase to 1.1 percent, largely because of weak software-related investment, as indicated by dynamic statistics from the service sector.

The scale of tariffs announced by the US administration since early spring were considerably larger than many had expected, Bank of Japan Governor Kazuo Ueda told a meeting held by the Research Institute of Japan on June 3.

He acknowledged that despite recent developments — including an agreement between the United States and China to reduce tariffs temporarily — uncertainty remains high regarding economic activity and prices at home and abroad.

"These developments in trade policies will exert downward pressure on Japan's economy through several different channels," he said.

Still, he stated that the underlying mechanism by which wages and prices rise moderately in interaction remains intact.

Should Japan's underlying consumer price index inflation approach the Bank of Japan's price stability target of 2 percent, the central bank will continue to raise its policy interest rate and adjust the degree of monetary easing, in line with improvements in economic activity and prices, he said.

Given the extremely high uncertainties over the future course and the effects of trade policy, the central bank will carefully examine factors such as developments in economic activity, prices and financial markets both at home and abroad — making decisions without presuming its outlook will materialize, Ueda said.

During its monetary policy meeting earlier this year, the central bank left its benchmark policy interest rate unchanged at 0.5 percent.

It also downgraded its growth projection for Japan as the economy faces rising uncertainties from US tariffs.

In a report released on May 1, the central bank cut its GDP growth forecast for the 2025 fiscal year to 0.5 percent from 1.1 percent projected in January. The forecast for the 2026 fiscal year was also lowered to 0.7 percent from 1 percent.

Japan's chief tariff negotiator Ryosei Akazawa met on Friday with US Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick in Washington.

Akazawa again strongly urged the US to reconsider its tariff measures.

According to the Cabinet Secretariat of Japan, both sides agreed to continue to vigorously coordinate to ensure a mutually beneficial agreement, bearing in mind a possible exchange between the leaders of both countries around the occasion of the G7 summit to be held in Canada this month.

jiangxueqing@chinadaily.com.cn