Japan's Economy Contracts Amid Trade, Demand Woes

Japan's economy contracted by 0.2% quarter-on-quarter and 0.7% annualized in the first quarter of 2025, marking its first contraction in a year and surpassing economists' expectations for a milder decline. The downturn was driven by flat private consumption and a 0.6% drop in exports, while imports rose by 2.9%, compounding GDP weakness. Aggressive tariff policies from U.S. President Donald Trump and unresolved trade negotiations with the U.S. added to the pressure, prompting major Japanese automakers to brace for profit hits and growing policy uncertainty. Despite a slight rise in capital expenditure, inflation remains above the Bank of Japan's 2% target. The Bank now faces a delicate balance between supporting a fragile recovery and controlling inflation. Financial markets in Asia-Pacific reacted mixedly, with Japanese indices mostly falling and the yen under pressure.