TOKYO, Japan: Japan’s economy contracted for the first time in a year, shrinking at a faster pace than expected in the first quarter as steep U.S. tariffs cast a shadow over the export-dependent economy.

Data showed that the economy shrank at an annualized rate of 0.7 percent in the January-March period, far worse than the 0.2 percent decline forecasted by analysts.

The slump was driven by stagnant private consumption and falling exports, highlighting the vulnerability of Japan’s recovery even before President Donald Trump announced sweeping tariffs in early April. The export-heavy automobile sector is particularly at risk as the U.S. moves to impose a 24 percent tariff on Japanese goods starting in July unless a deal is reached.

Despite the grim headline figure, there were some bright spots in the data. Capital expenditure rose 1.4 percent, exceeding expectations and contributing 0.7 percentage points to GDP growth. The GDP deflator, a measure of price pressures in the economy, increased by 3.3 percent in the first quarter, marking the second consecutive quarterly rise.

Economic Revitalisation Minister Ryosei Akazawa acknowledged the challenges posed by U.S. trade policy, warning that tariffs could further dent consumption and household sentiment. “We must be mindful of downside risks to the economy from U.S. tariff policy,” Akazawa said.

Exporters are already feeling the pinch. Toyota Motor said it expects profit to decline by 20 percent this financial year, and Mazda has delayed its earnings forecast due to uncertainty over U.S. trade measures.

While the Bank of Japan hiked interest rates to 0.5 percent in January after a decade of near-zero rates, it has since scaled back its growth projections and warned that ongoing tariff tensions could force it to reconsider further rate increases.

Analysts warn that the risk of another contraction looms in the second quarter, particularly if U.S. tariffs take a heavy toll on capital spending and exports. “The early-year contraction serves as a reminder of Japan’s economic struggles,” said Stefan Angrick, head of Japan and Frontier markets Economics at Moody’s Analytics.