Sentiment among Japanese merchants sank to the lowest in more than three years, underscoring deepening concerns over the economic outlook at home and abroad as the impact from U.S. tariffs begins to filter into the economy.

A gauge of confidence among store managers, taxi drivers and others who interact directly with Japanese consumers dropped 2.5 points to 42.6 in April, according to the Cabinet Office’s Economy Watchers survey released Monday. A reading below 50 signals that pessimists outnumber optimists.

The figure came in below economists’ forecast of 44.6 and marked the weakest reading since February 2022, when businesses were still grappling with pandemic-related restrictions.

The deterioration reflects rising unease among businesses following a flurry of U.S. tariff announcements. Japan’s exports slowed in the first 20 days of April after the U.S. put a 25% levy on imports of steel and aluminum from March and added a similar duty on autos from April. Japan also faces a 10% baseline tariff on other goods that is scheduled to rise to 24% in a couple of months.

Japan’s biggest companies are beginning to slash their profit forecasts due to U.S. trade policies, with Toyota reporting last week that its profits will sink by about one-third this fiscal year compared to last year.

The Cabinet Office said it has recently seen "signs of weakness” in the economy, softening its tone from the previous month by dropping a reference to a "modest recovery.” For businesses of all types, an index measuring the outlook slumped to 42.7, the weakest reading since April 2021.

Although manufacturers are expected to bear the brunt of the new tariffs, sentiment also deteriorated among retailers and service providers, as persistent inflation continues to weigh on consumer confidence. Japan’s overall inflation has remained at or above the Bank of Japan’s 2% target for nearly three years, intensifying the squeeze on household budgets.

Weak demand both domestically and internationally casts a shadow over Japan’s already uneven recovery. Analysts widely expect GDP figures due Friday to show that the economy contracted in the first quarter — even before the 25% auto tariff came into effect.