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Japan’s economy shrank at an annualised rate of 1.8 per cent in the latest quarter, as US tariffs hit exports and housing investment plunged ahead of a major stimulus package expected this month to boost the struggling economy.
The decline in real GDP for the July to September period was less severe than economists’ median forecast of a 2.5 per cent fall, but the contraction was the first in six quarters. It came at a critical juncture as the country awaits the new government’s spending plans and the central bank weighs raising interest rates.
Japan’s Prime Minister Sanae Takaichi came to power in October with a pledge to help households struggling with rising living costs. She is expected to unveil a significant stimulus package as soon as this week aimed at boosting Asia’s largest developed economy.
The hit to GDP was in large part driven by a drop in net goods and services exports, caused by the uncertainty around US President Donald Trump’s tariffs, which contributed to a 0.2 per cent decline in overall quarterly GDP.
In the previous April to June quarter, which directly followed Trump’s “liberation day” tariff announcement, exports rose sharply as companies frontloaded shipments to the US.
Tokyo and Washington ultimately hammered out a deal with a reduced tariff of 15 per cent on Japanese exports, down from Trump’s threatened level of 25 per cent, as well as a $550bn commitment of Japanese investment in the US.
“Tariffs and tariff threats are damaging exports and industrial production. Household spending is weak as inflation outpaces wage growth, and pay gains may slow further if tariff pain derails the economy,” said Moody’s Analytics Japan economist Stefan Angrick, adding that the Japanese economy was mired in the same rut for the past three years.
The reading also revealed the extent to which rising living costs have hurt Japanese household spending. Private consumption, which drives about half the economy, rose by just 0.1 per cent from the previous quarter, while individual housing investment plummeted 9.4 per cent.
Analysts said the weak GDP figures were likely to strengthen Takaichi’s determination to press ahead with large fiscal spending plans, despite rising concerns that a substantial commitment — funded by yet more debt issuance — would cause volatility in the Japanese government bond market.
The contraction will complicate decision-making for the Bank of Japan ahead of a pivotal policy meeting in December, when the central bank is increasingly expected to raise interest rates.
Despite rising inflation and some signals of overheating in bank lending, the BoJ kept interest rates on hold late last month.
But the argument for an increase may now be weaker, given the signals in the latest GDP numbers, analysts warned, pushing the likelihood of a rate rise into 2026.
