Japan’s Economy Contracts for First Time in Six Quarters
Weakness in the economy could bolster views that the Bank of Japan will wait until next year to make any policy moves
- Japan’s economy contracted by 0.4% in the July-September quarter, its first decline in six quarters, complicating future interest rate hikes.
- External demand subtracted 0.2 percentage point from GDP due to higher U.S. duties, while housing investment fell 9.4%.
- Private consumption increased by 0.1%, slower than the previous quarter, as inflation outpaced wage growth.
TOKYO—The Japanese economy contracted for the first time in six quarters, further complicating the timeline of the central bank’s next interest-rate hike.
Real gross domestic product shrank 0.4% on a quarter-over-quarter basis, preliminary government data showed Monday. That compared with the 0.6% growth recorded in the April-June period and marked the first contraction since the first quarter of 2024.
In annualized terms, the economy shrank 1.8%.
Weakness in the economy could bolster views that the Bank of Japan will wait until next year to make any policy moves. The central bank has kept interest rates on hold at 0.5% since January due to lingering uncertainties over the impact of U.S. tariffs on the economy.
“The fall in output last quarter should give the Bank of Japan further pause for thought and means that a rate hike in December remains unlikely,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.
Thieliant expects the central bank to resume monetary tightening in January if the tankan corporate survey due in mid-December, as well as industrial production figures for October and November, point to a rebound in economic activity in the fourth quarter.
Monday’s data showed that external demand, or exports minus imports, subtracted 0.2 percentage point from GDP during the July-September quarter, reflecting the effect of higher U.S. duties. Although the Japanese government has reached a trade agreement with the Trump administration, Japanese companies still face a 15% tariff on their U.S.-bound exports.
Housing investment was another big drag, falling 9.4% from the previous quarter. That said, economists think the decline is due to temporary factors related to regulatory changes and expect the market to recover.
However, as the housing sector is sensitive to interest rates, the government may be more opposed to a rate hike after seeing the weak results, some economists say. The BOJ’s next policy-setting meeting is scheduled for Dec. 18-19.
Other key segments of the Japanese economy showed mixed signals. Capital expenditure rose 1.0% from the previous quarter, suggesting that demand for labor-saving investment and digitalization remains strong despite the headwind from U.S. tariffs.
Meanwhile, private consumption increased 0.1%, slower than the 0.4% rise in the April-June period, as inflation continued to outpace wage growth and weighed on consumer appetite.
Prime Minister Sanae Takaichi has called for economic growth driven by higher incomes, and her cabinet is currently compiling an economic stimulus package that will include measures to ease the burden of rising living costs.
“Given the negative growth in the July-September quarter, it would not be logical for the BOJ to raise interest rates at its December meeting immediately after the government passes a supplementary budget for economic stimulus to boost domestic demand through the Diet,” said Crédit Agricole economist Takuji Aida.
The central bank is expected to thoroughly examine the effects of the government’s measures in its quarterly economic report due January before making its next move, he said.