Japan: Economy slips into contraction in the third quarter of 2025
GDP reading: Japan’s GDP contracted 2.3% on a seasonally adjusted quarter-on-quarter annualized (SAAR) basis in Q3, following a 2.1% expansion in the previous quarter. The decline, which was slightly less sharp than economists had expected, marks the end of a relatively strong five-quarter streak of growth.
Drivers: Compared with the prior quarter’s data, figures in Q3 softened for private consumption (+0.8% in SAAR terms vs +1.0% in Q2), fixed investment (-6.1% vs +3.9% in Q2), exports of goods and services (-4.9% vs +8.0% in Q2), imports of goods and services (-1.8% vs +5.7% in Q2) and government consumption (+0.6% vs +1.4% in Q2).
In terms of drivers, the highest inflation rates in decades continued to stifle private consumption, U.S. tariffs dampened exports, and new energy regulations affecting the construction industry hurt fixed investment.
On a year-on-year basis, economic output expanded 0.6% in Q3, following a 2.0% expansion in the prior quarter.
Panelist insight: Goldman Sachs’ Yuriko Tanaka said:
“Going forward, we expect housing investment to return to positive territory, but with the global economy expected to slow, led by the US, we look for exports to stagnate from 2025 Q4 through early 2026. It is also conceivable that year-end bonuses will be restrained by worsening corporate profits, and we think growth in private consumption will remain moderate. We forecast that 2025Q4 GDP will be lifted to +1.3% qoq annualized by a rebound in housing investment and inventories, and then return to a growth pace of around +0.7-0.8%.”