Japan’s economy contracted nearly 2% in the July–September period, marking the first decline in six quarters as U.S. tariffs hit exports, government data showed on Monday. Automakers were among the hardest hit, with shipments dropping sharply after a surge in exports ahead of tariff implementation.
Despite the weak figures, economists noted that the downturn was milder than expected and likely reflects temporary disruptions rather than the start of a recession. Kazutaka Maeda of Meiji Yasuda Research Institute said the contraction was driven by “one-time factors,” including regulatory changes affecting housing investment, alongside weaker exports. While underlying momentum remains soft, he added that Japan’s economy is still on track for gradual recovery over the next one to two years.
Most economists agreed that the latest GDP data will have limited impact on the Bank of Japan’s upcoming interest-rate decisions. Inflation trends remain more influential. However, Credit Agricole chief Japan economist Takuji Aida, who advises Prime Minister Sanae Takaichi, said the contraction strengthens the case for delaying any rate hike in December.
Automakers Cut Prices as Tariffs Bite
Japan’s GDP fell 1.8% on an annualized basis in the third quarter, compared with a revised 2.3% expansion in the previous quarter. The decline was smaller than economists’ average forecast of a 2.5% contraction. Quarter-on-quarter, GDP slipped 0.4%, also slightly better than the expected 0.6% fall.
Exports were the biggest drag as higher U.S. tariffs took effect. Automakers saw a steep drop in shipment volumes, reversing earlier front-loaded exports. Many firms absorbed the tariff impact by reducing prices. Net external demand reduced GDP by 0.2 percentage points after providing a positive contribution in the previous quarter.
The United States and Japan formalized an agreement in September that imposed a baseline 15% tariff on most Japanese imports, replacing earlier tariff rates of 27.5% on autos and 25% on other goods.
Domestic Demand Mixed but Stable
Housing investment weakened as new energy-efficiency rules introduced in April slowed development activity. Private consumption, which accounts for more than half of GDP, rose 0.1%—in line with forecasts but weaker than the 0.4% growth seen in the prior quarter as households felt the pressure of higher food prices.
However, capital expenditure was a bright spot, rising 1.0% and easily beating expectations of 0.3%. Economic Revitalization Minister Minoru Kiuchi said the increase in both private consumption and business investment supports the view that Japan’s economy remains on a moderate recovery path.
Private forecasts also point to improvement ahead. A Japan Center for Economic Research poll of 37 economists predicts 0.6% growth in the October–December quarter.
The GDP slump arrives as Prime Minister Takaichi’s administration prepares a major stimulus package aimed at helping households cope with rising living costs. Reports suggest the plan will exceed 17 trillion yen ($110 billion). Nomura economist Uichiro Nozaki said the measures, expected to roll out from late winter, should improve real household incomes and help support consumption in early 2025.
