Due to the impact of US tariffs, the Japanese economy shrunk by 1.8%.

Due to heavy tariffs imposed by the United States, the Japanese economy contracted by 1.8% on an annualized basis in the third quarter of 2025, marking the first negative growth in six quarters. Preliminary data released by the Japanese Cabinet Office on Monday showed that the GDP for the quarter fell by 0.4% compared to the last quarter, which was better than the market's expected decline of 2.5%. However, the economic momentum has significantly slowed down, posing greater challenges for the Bank of Japan in formulating monetary policy and the government in advancing fiscal policy. External demand became a drag on the GDP contribution this quarter, changing from a positive 0.2 percentage points in the previous quarter to a negative 0.2 percentage points. The increase in tariffs on certain goods by the United States has significantly impacted export-dependent Japan, with September exports of automobiles to the US dropping by 24.2% year-on-year. Although both parties reached an agreement in July to lower tariffs uniformly to 15%, exports for the quarter still decreased by 1.2% compared to the previous quarter, and the automotive industry is Japan's largest sector in export to the US. Domestic demand in Japan showed mixed performance. Personal consumption, accounting for over half of the GDP, only slightly increased by 0.1%, significantly slower than the 0.4% growth in the previous quarter, partly due to the high prices of food continuing to suppress household spending. Business equipment investment grew by 1.0%, significantly higher than market estimates, becoming one of the few bright spots. On the other hand, residential investment saw a sharp decline due to tightening environmental standards for new construction. The GDP deflator index rose by 2.8% year-on-year, indicating that the underlying inflation remains sticky. The Japanese Cabinet is expected to pass an economic stimulus package worth over 17 trillion yen this week. Additionally, the Bank of Japan maintained interest rates at 0.5% last month and had previously indicated that they would consider further tightening policies if the economy met expectations. However, given the likelihood of economic contraction in the third quarter, the Bank of Japan may avoid raising rates in December.