Japan’s economy contracted in the first quarter of 2025, but at a slower pace than initially estimated, according to revised government data released Monday. The Cabinet Office reported that gross domestic product (GDP) shrank at an annualized rate of 0.2% from January to March, a significant improvement from the preliminary estimate of a 0.7% decline and better than economists’ median forecasts.
On a quarter-on-quarter basis, the revised figures show the economy was flat, with no change in inflation-adjusted terms, compared to the previously reported 0.2% decrease. The upward revision was largely driven by a modest improvement in private consumption which accounts for over half of Japan’s economic activity—now showing a 0.1% increase, up from an earlier reading of no change. However, capital expenditure was revised down to a 1.1% rise from the initial 1.4% estimate, still reflecting solid business investment but slightly below expectations.
Despite the better-than-expected data, Japan’s outlook remains clouded by external risks. Net exports (exports minus imports) subtracted 0.8 percentage points from growth, as exports fell for the first time since early 2024 and imports rebounded. The country faces the looming threat of a 24% U.S. tariff set to take effect in July, unless a deal is reached, with particular concern for Japan’s vital automotive sector.
Economists warn that the revised data confirms the economy was already losing momentum before the latest round of U.S. tariffs, raising fears of a potential technical recession if growth does not pick up in the current quarter. Policymakers are also concerned that ongoing trade tensions could complicate the Bank of Japan’s efforts to normalize monetary policy, with a key central bank meeting scheduled for next week.
In summary, while Japan’s Q1 contraction was less severe than feared thanks to slightly stronger domestic demand, the economy remains vulnerable to global trade headwinds and policy uncertainty.