According to the latest data released by the Japanese government, Japan’s economy contracted at an annual rate of 1.8% in the third quarter (July-September), marking the first negative growth in six quarters. However, the decline was smaller than the market’s expectation of 2.5%. Many economists believe that this recession is caused by short-term factors such as “residential investment being affected by regulations, and exports reacting to tariffs”, rather than a shift into an economic downturn.
Japan’s Minister for Growth Strategy, Toshiro Uchi, stated that six consecutive quarters of private consumption growth and four consecutive quarters of capital expenditure growth indicate that the economy is still on a path of moderate recovery. Most economists expect the economy to rebound by around 0.6% in the fourth quarter.
Reports from Reuters indicate that Japanese automakers shipped goods to the US ahead of the tariff imposition, resulting in a sharp drop in exports in the third quarter as the US raised tariffs. Net exports shifted from making a positive contribution in the second quarter to dragging GDP growth by 0.2 percentage points.
The US-Japan tariff agreement officially took effect in September, imposing a 15% standard tariff on imported goods to Japan, compared to the previous 27.5% on automobiles in July, and 25% on most other goods.
Regarding domestic demand, private consumption, which accounts for more than half of GDP, grew by 0.1% this quarter, in line with market expectations but lower than the 0.4% growth in the second quarter, reflecting a dampened consumer willingness due to higher food prices. Additionally, residential investment slowed down due to new regulations on energy efficiency, hindering overall growth.
In contrast, corporate capital expenditure grew by 1.0%, exceeding the market’s estimate of 0.3%, becoming a highlight. Minister Toshiro Uchi emphasized in a statement that the continuous growth of private consumption for six quarters and capital expenditure for four quarters indicate that the economy is still on a path of mild recovery.
Economist Kazutaka Maeda from Meiji Yasuda Comprehensive Research Institute pointed out that the contraction in the third quarter was mainly due to one-time factors, such as “residential investment being affected by regulations, and exports reacting to tariffs.” Despite the lack of strong momentum, the overall trend still points towards a gradual recovery over the next one to two years.
As these weak GDP figures are released, Prime Minister Sanae Takii’s government is formulating a new round of economic stimulus measures to assist families in coping with high prices. Finance Minister Takao Katayama reported that the stimulus package is expected to exceed ¥17 trillion (about $110 billion).
Economist Uichiro Nozaki from Nomura Securities expects the government to introduce measures in the winter to spring period that can boost real incomes for households, providing support for consumption in the first half of next year.
However, there remains uncertainty in the outlook for monetary policy. A majority of economists interviewed by Reuters believe that the third-quarter GDP will have limited impact on the Bank of Japan’s (BOJ) interest rate decision in December, with factors such as inflation still being the key focus.
Chief economist Takashi Huijita from Crédit Agricole in Japan stated that “raising interest rates in the context of economic contraction would be a misjudgment,” emphasizing that policies should continue to focus on supporting recovery. He is also a member of the core committee of the Takii government’s Economic Growth Strategy Council.
A survey of 37 economists by the Japan Center for Economic Research shows that most expect the economy to rebound by around 0.6% in the fourth quarter, indicating a general belief in the market that this contraction is a temporary adjustment.