Japan’s economy shrank at a slower pace than anticipated in the third quarter of 2025, supported by resilient domestic consumption even as exports weakened under the weight of US tariffs and cooling global demand.
Updated government data released for the quarter ended September showed the economy contracted 0.4% from the previous three months, better than the 0.6% decline forecast by economists polled by Reuters.
On an annualized basis, GDP fell 1.8%, also outperforming expectations for a deeper 2.5% contraction.
The figures reflect a mixed economic picture: while domestic activity provided some support, external headwinds and a pullback in private demand continued to drag on overall growth.
Exports weigh on growth as tariff effects linger
Japan’s exports remained under pressure through most of the quarter, shrinking 1.2% compared with the second quarter, when shipments had risen 2.3%.
The decline in net exports subtracted 0.2 percentage point from GDP.
Japanese shipments had contracted for four consecutive months from May as US tariffs weakened demand.
However, export data for September offered a modest respite, showing a return to growth.
Tokyo’s July trade agreement with Washington—lowering tariffs on Japanese exports to the US from 25% to 15%—has offered some relief.
The reduced tariffs took effect on August 7.
Although the positive impact is still filtering through the economy, economists note that easing uncertainties surrounding US trade policy may help stabilize orders in the months ahead.
Harumi Taguchi, principal economist at S&P Global Market Intelligence, said he expects GDP growth to improve going forward, with diminishing effects from new housing regulations and a more predictable trade environment.
He added that the recent agreement between Washington and Beijing to reduce reciprocal tariffs also appears to be supporting Japanese export orders.
Domestic consumption offers support despite housing slump
Domestic demand helped soften the downturn.
Government consumption rose 0.5%, while private consumption posted a modest 0.1% gain compared with the previous quarter.
Public demand remained a bright spot, growing 0.5% and contributing 0.1 percentage point to overall GDP.
However, private demand was the largest drag on the economy, declining 0.4% and pulling GDP down by 0.3 percentage point.
Residential investment was particularly weak, plunging 9.4%.
Analysts attribute the slump in part to stricter energy conservation standards for new construction, introduced in April 2024, which have temporarily slowed new project activity.
Taguchi noted that the impact of these rules is likely to fade with time, suggesting the housing sector may stabilize as builders and buyers adjust to the updated requirements.
Geopolitical tensions add new risks
Beyond economic indicators, diplomatic friction with China has emerged as a potential risk to Japan’s outlook.
Relations have deteriorated following reported remarks by newly elected Prime Minister Sanae Takaichi, who said a Chinese attack on Taiwan would constitute a “survival-threatening situation” for Japan—comments that Beijing sharply criticized.
China has warned its citizens against traveling to Japan, a significant development given that Chinese travelers represent the largest share of foreign visitors this year, at 22.8% according to Japan’s National Tourism Organization.
A sustained drop in tourism could add fresh pressure to Japan’s recovery.
Despite these uncertainties, economists remain cautiously optimistic that easing tariff pressures and stabilizing domestic consumption will support a gradual rebound in the quarters ahead.
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