Japan’s economy contracts amid export slump and tariff pressures

Monday 17 November 2025 - 11:20

By: Dakir Madiha

Japan’s economy contracts amid export slump and tariff pressures

Japan’s economy contracted by 1.8% on an annualized basis in the third quarter of 2025, marking its first decline in six quarters as US tariffs weighed heavily on exports. The quarter-on-quarter drop of 0.4% was milder than economists’ forecasts, but it highlighted the difficulties facing the export-reliant nation.

Exports were the main drag on growth, falling 1.2% from the previous quarter due to the impact of higher US tariffs, particularly on the automotive sector. Although Japan and the US reached a trade agreement in July that reduced tariffs to 15% from previous rates as high as 27.5% for autos, export volumes plunged, particularly in shipments to the US market. This contributed to a net external demand decline which subtracted 0.2 percentage points from GDP growth, reversing a previous positive contribution.

Domestically, signals were mixed. Private consumption, which accounts for over half of Japan’s economic output, grew by a modest 0.1%, reflecting households’ cautious spending amid rising food prices. On the investment front, capital expenditure exceeded expectations with a 1.0% increase, signaling continued corporate confidence. However, residential investment was sharply down, impacted by stricter environmental regulations imposed in April.

The economic slowdown has dimmed expectations for a Bank of Japan interest rate hike in December. While the central bank had maintained steady rates amid inflation concerns, the contraction and evolving economic indicators suggest a more cautious policy approach. A government stimulus package exceeding 17 trillion yen ($110 billion) is expected soon to support households facing rising living costs.

Despite this contraction, analysts remain hopeful for a gradual recovery in the coming quarters as policies are enacted and global trade conditions stabilize.