The heavy blow of Trump's tariffs has not yet landed, and the Japanese economy has already fallen into a "technical recession" cliff

According to a Bloomberg survey of economists, the Japanese economy may fall into contraction in the first quarter of this year, indicating that the country's economic weakness has already emerged before the full impact of U.S. tariff measures. The median forecast from economists shows that the inflation-adjusted annualized quarterly GDP is expected to shrink by 0.3%, marking the first quarterly negative growth for Japan in a year.

Economic contraction will cast a shadow over the Bank of Japan's policy normalization process and Prime Minister Shigeru Ishiba's prospects for the summer elections. Japan's economic weaknesses have already been exposed before the implementation of severe tariffs by its largest security partner, with the risk of a technical recession on the rise.

Japan's GDP is expected to shrink in the first quarter.

In the preliminary GDP data set to be released this Friday, analysts believe multiple factors are at play: the net export boost from an unexpected decline in imports last quarter is fading, while consumer spending continues to weaken under high inflation.

Yoshitaka Shinkai, a senior economist at Dai-ichi Life Research Institute, stated, "The Japanese economy currently lacks growth engines, and this is before the impact of Trump's tariffs. I believe there is a high possibility of consecutive quarters of contraction ahead."

Consumer spending remains below pre-pandemic levels.

Against the backdrop of unresolved deadlock in U.S.-Japan trade negotiations, any signs of economic weakness will intensify pressure on policymakers. U.S. Commerce Secretary Gina Raimondo stated last week that reaching an agreement with Japan would require "a lot of time," while President Trump simultaneously announced a framework agreement with the UK.

This data may reinforce the Bank of Japan's wait-and-see stance. Earlier this month, the policy committee led by Kazuo Ueda postponed the timeline for achieving stable inflation targets by a year and halved the growth forecast for this fiscal year—the largest downward revision since the forecast was released in 2023.

Following the dovish signals from the policy meeting that ended on May 1, institutions including Goldman Sachs and Barclays have postponed their expectations for the timing of the next interest rate hike.

Masamichi Adachi, chief economist for Japan at UBS Securities and a former Bank of Japan official, pointed out, "The Bank of Japan may have to wait at least until next year to take action, and it is even possible that the focus of policy could shift to interest rate cuts before the end of the year."

Affected by tariffs, large Japanese companies have begun to lower their profit expectations. Toyota Motor Corporation predicted last week that profits for this fiscal year would decline by about one-third year-on-year, with President Akio Toyoda stating that the tariff details "still have huge variables, making it difficult to take countermeasures."

The shrinking corporate profits will exacerbate concerns about the sustainability of Japan's "inflation-wage" cycle. Over the past three years, due to the rise in living costs far exceeding the central bank's 2% target, real wages have continued to decline, leading to sluggish consumption Adachi Masamichi believes: "Japan is experiencing a local version of stagflation, with consumer spending insufficient to support an overall moderate recovery."

Inflationary pressures have caused Shigeru Ishiba's approval rating to drop to its lowest level since he took office in October last year. Weak GDP data ahead of the summer House of Councillors election may trigger a new round of political maneuvering for economic stimulus plans. However, it should be noted that Japan's GDP data has a history of significant revisions.

The initial estimate for Q4 2024 GDP shows an annualized growth of 2.8%, far exceeding the median forecast of 1.1%, mainly due to a decline in imports. Araki Yoshitake pointed out that service sector consumption may exceed expectations, as recent data shows an unexpected surge in the service industry.

According to estimates from the Cabinet Office of Japan, Japan's potential growth rate is about 0.6%, the lowest among the G7 countries, which means that even a slight shock could trigger an economic contraction. If the previous quarter is confirmed to have contracted, it would be the sixth recession since 2021, while the U.S. has only experienced two during the same period.

Araki Yoshitake warned: "Trump personally is creating significant risks, and his policy reversals could lead to a sharp turn in the outlook. The current economic situation is not optimistic, and the possibility of recession cannot be ruled out."