Japan’s economy contracted in the third quarter of 2025, but less than expected, amid conditions marked by weakening exports due to pressure from American import duties, persistent inflation and sluggish real estate investment.
According to the first official estimate published by the government on Monday, the world’s fourth-largest economy’s gross domestic product (GDP) fell 0.4% during the July-September period compared to the previous quarter. These were her first contractions in a year and a half. Analysts polled by Bloomberg expected an even bigger decline (-0.6%).
This gloom could strengthen the possibility of a major plan to support such activities, as mentioned by new Prime Minister Sanae Takaichi when he came to power last month. Japan’s GDP increased by 0.6% in the second quarter (growth was revised upwards this Monday), after a more or less sluggish first quarter (+0.2%), following stagnation in 2024.
According to government data, Japan’s economy has slumped in recent months due to weakening private investment in real estate. “This is one of the main factors of this contraction: a 9.4% drop in housing investment compared to the previous quarter, reflecting the impact of changes to building regulations introduced in April, which halved construction starts,” commented Marcel Thieliant, analyst at Capital Economics.
Highly dependent on exports
In addition, Japan’s economy, which relies heavily on exports, is still burdened by Washington’s customs policies, despite a trade agreement agreed in the summer between the two countries – which sets American tariffs on Japanese products at 15%, below the threatened 25% tariff.
In total, all countries combined, Japan’s exports fell 0.1% in August year-on-year, the fourth consecutive month of decline. Japanese exports recovered in September thanks to semiconductors, but Japanese exports to the United States continued to decline (-13.3% on year). Finally, even if this is rejected, private consumption remains almost stagnant amid persistent inflationary pressures.
Inflation in Japan accelerated further in September (+2.9% year-on-year) after slowing in previous months, driven by rice prices and especially energy prices, and was well above the 2% target set by the Bank of Japan. This country, which has long been threatened with deflation, has faced continuous increases in consumer prices since 2022.
“The decline in GDP in the last quarter further reduces the likelihood of an interest rate hike by the Bank of Japan (BOJ) in December, but we remain confident that the institution will resume the monetary tightening cycle at its January meeting,” estimates Marcel Thieliant.
To combat the return of inflation, the BoJ began tightening interest rates in March 2024, after ten years of highly accommodative monetary policy, but the central bank stopped this dynamic after last January due to increasingly dark economic conditions.
