Japan's economy contracted by 0.2% on an annualized basis in Q1 of 2025, performing better than the preliminary estimate of a 0.7% decline. However, the latest figure marked a reversal from the downwardly revised 2.2% growth in Q4 and represented the first yearly decline in a year. The contraction was driven in part by a drag from net exports amid rising U.S. tariffs, with Japan’s key automotive sector facing a 25% levy. Government spending also fell for the first time in five quarters, posting the steepest drop in seven quarters. On the positive side, both private consumption and capital expenditures expanded for the fourth straight quarter, with their growth gaining momentum.