Japan's Q1 GDP Confirmed to Have Contracted, Focus Turns to Japan-U.S. Talks for Prospects of BOJ Rate Hikes

TradingKey - Benefiting from improved consumption, the revised contraction for Japan's Q1 GDP in fiscal 2025 was less severe than initially estimated. Nevertheless, Japan's economy still shrank, adding uncertainty to the Bank of Japan's (BOJ) prospects for rate hikes. Ongoing trade negotiations between Japan and the U.S. may help ease these concerns.

On Monday, June 9, Japan's Cabinet Office reported that the revised annualized quarterly GDP growth rate for Q1 this year was -0.20%, higher than the preliminary reading and economists' expectations of -0.70%.

Specifically, private consumption rose by 0.1%, compared with a preliminary 0.0%. Business investment increased by 1.1%. External demand, weighed down by imports and exports, dragged economic growth down by 0.8 percentage points, while domestic demand contributed 0.8 percentage points to growth.

The contraction in Japan’s Q1 economy indicates that the world’s fourth-largest economy had already begun slowing before Trump’s tariffs were imposed. Starting in July, Japan will face a 24% tariff from the U.S., unless progress is made on a trade deal.

Currently, Japan and the U.S. are holding consultations regarding tariff rates, with Japan repeatedly urging the U.S. to reduce the additional 25% tariff on automobiles — Japan's largest industry.

On June 7, Japan stated that some progress has been made in the bilateral talks, though no agreement has yet been reached. Reports suggest Japanese Prime Minister Ishiba Shigeru and U.S. President Donald Trump plan to hold bilateral talks during the G7 summit in Canada from June 15–17.

In their last policy meeting statement, BOJ policymakers halved their economic growth forecast for the current fiscal year to 0.5%, highlighting the negative impact of U.S. tariffs on Japan's export-dependent economy. 

However, the BOJ noted it would continue raising borrowing costs if the economic outlook materializes.

The BOJ will hold its monetary policy meeting on June 17, and most analysts expect the central bank will further delay interest rate hikes and discuss adjustments to its bond-buying program at the meeting.