Japan’s economy contracted in the first quarter, driven by weaker private consumption and external demand, challenging policymakers as the central bank aims to raise interest rates. Preliminary GDP data showed a 2.0% annualised shrinkage from January to March, worse than the 1.5% drop forecasted. This followed a slight growth in the previous quarter, translating to a 0.5% quarterly contraction. Private consumption fell 0.7%, marking the fourth consecutive quarterly decline. Capital spending decreased by 0.8%, and external demand subtracted 0.3 percentage points from GDP. Policymakers hope rising wages and tax cuts will boost consumption. Despite raising interest rates in March, the Bank of Japan is expected to proceed cautiously given the economy’s fragility.