Japan’s Q3 Economy Contracts as U.S. Tariffs Weigh on Exports

Japan’s economy contracted in the third quarter of 2025, driven by export declines tied to U.S. tariffs, even as capital expenditure and consumption provided limited support.

What We Know

Japan’s gross domestic product shrank at an annualized rate of 1.8% in the July–September quarter, its first contraction in six quarters. On a quarter-on-quarter basis, GDP fell 0.4%, slightly better than the 0.6% drop forecast by economists. Exports contracted sharply, weighing on growth as newly implemented U.S. tariffs began to bite. In contrast, capital expenditure rose 1.0% and private consumption inched up 0.1%, though both remained muted relative to recent quarters. Housing investment declined, partly due to stricter energy-efficiency regulations introduced in April.

What It Means

The Q3 contraction reflects immediate external pressures on Japan’s trade-dependent economy, but does not yet signal a broader downturn. Stronger-than-expected capital investment indicates corporate resilience, while modest consumption suggests households are holding firm despite rising costs. Policymakers are expected to view this as a temporary setback. The government is preparing a substantial stimulus package, valued at over ¥17 trillion, aimed at cushioning households and supporting exporters. For the Bank of Japan, the data may reinforce caution on hiking interest rates, with inflation trends likely to carry more weight in upcoming policy decisions.

What’s Next

Markets anticipate a rebound in Q4, with private-sector forecasts projecting around 0.6% growth heading into October through December. The government’s forthcoming stimulus measures could underpin this recovery by bolstering consumption and offsetting tariff pressures.