Asia-Pacific Markets Mixed as Japan’s Economic Contraction Raises Growth Concerns

Asia-Pacific markets ended Friday on a mixed note as investors digested weaker-than-expected economic data from Japan and monitored broader regional developments, including ongoing global trade discussions and the trajectory of interest rates.

Japan’s benchmark Nikkei 225 index closed flat at 37,753.72, while the broader Topix inched up 0.05% to 2,740.45. This comes after government data showed that Japan’s economy shrank by 0.2% in the first quarter of 2025 compared to the previous quarter, marking the first contraction in a year. The decline, larger than the 0.1% contraction forecasted by economists, highlights challenges facing the country’s recovery amid external headwinds and tepid domestic demand.

On an annualized basis, Japan’s real gross domestic product (GDP) fell 0.7%. Exports declined at a 2.3% annual rate, while private consumption, which accounts for over half of the country’s economic output, remained flat. In contrast, capital investment rose 5.8%, offering some support to domestic demand.

The data comes at a time when Japan is navigating trade negotiations with the United States, as Washington implements a series of tariffs on foreign goods. Analysts warn that continued uncertainty surrounding US trade policy, particularly under President Donald Trump, could negatively impact Japan’s key export sectors, especially automobiles. Japanese automakers such as Toyota and Mazda have already signaled concerns, with Toyota forecasting a profit decline and Mazda delaying financial guidance amid trade uncertainties.

Financial markets are also closely watching the Japanese yen, which traded at 145.52 per US dollar. Analysts from the Commonwealth Bank of Australia noted that weak GDP data could influence the Bank of Japan’s (BOJ) future interest rate decisions, potentially reducing the likelihood of additional rate hikes in the near term.

Elsewhere in the region, market performance was varied. Australia’s S&P/ASX 200 rose 0.56% to 8,343.7, while South Korea’s Kospi gained 0.21% to 2,626.87. However, the small-cap Kosdaq in South Korea lost 1.11%, closing at 725.07. In India, the Nifty 50 dropped 0.26%. Hong Kong’s Hang Seng index declined 0.43%, and China’s CSI 300 slipped 0.46% to 3,889.09.

The mixed session in Asia came as global markets took a breather following a recent rally. In the United States, the S&P 500 posted its fourth straight day of gains on optimism surrounding easing trade tensions between the US and China and signs of moderating inflation. However, futures for US equity indices hovered near the flatline in Asian trading hours. Dow Jones futures rose 0.08%, while S&P 500 and Nasdaq 100 futures dipped slightly by 0.03% and 0.07%, respectively.

Back in Japan, policymakers are weighing their next steps as the country faces a combination of demographic challenges, slow consumption growth, and external pressures. While some economists have suggested a temporary reduction in the consumption tax to stimulate spending, the government has so far dismissed such proposals due to fiscal constraints tied to rising social welfare costs.

Meanwhile, the BOJ has been gradually tightening monetary policy, having raised interest rates to 0.5% earlier this year after years of near-zero or negative rates. However, the disappointing GDP data, coupled with concerns over potential fallout from global tariffs, could prompt a more cautious approach in the months ahead.

Japan’s Economic Revitalization Minister Ryosei Akazawa acknowledged the risks, stating that while wage increases may support moderate recovery, the outlook remains clouded by trade uncertainties and rising prices that could dampen household sentiment.

With input from Reuters, CNBC, and the Associated Press.