Queen City News reports Japan’s economy contracts due to sluggish consumer spending and automotive industry challenges.

The Japanese economy faced a setback as it shrank at an annual rate of 2% in the first quarter of this year, with a decline in consumption and exports, according to the government’s report on Thursday. Despite low unemployment rates at 2.6%, slow wage growth and rising prices have been a concern, exacerbated by the weakening yen against the U.S. dollar.

The preliminary seasonally adjusted gross domestic product (GDP) for the January-March period showed a 0.5% slip quarter-to-quarter. Analysts had predicted better results, but sluggish consumer spending, which accounts for half of Japan’s economic activity, proved to be a major obstacle.

The automotive sector also faced challenges, with Toyota Motor Corp.’s subsidiary experiencing production disruptions due to a safety scandal earlier in the year. However, with production now back on track, growth is expected to rebound in the coming months.

The data poses a dilemma for Japan’s central bank on the timing of further interest rate hikes, with expectations of a possible increase in July. The Bank of Japan had raised interest rates earlier this year for the first time since 2007, but with caution in a weak economy, policymakers are treading carefully.

Analyst Robert Carnell from ING noted that despite the setbacks, there are signs of gradual normalization in economic activity since March. The challenge now lies in balancing economic growth with the need for cautious monetary policy adjustments.