Japan’s economy contracts less than expected in third quarter, helped by consumption

Japan’s economy contracted by a smaller-than-expected 0.4% in the quarter ended September compared to the previous three months, helped by both private and government consumption.

Economists polled by Reuters had expected a 0.6% decline.

On an annualized basis, Japan’s GDP for the third quarter of 2025 fell 1.8%, a softer decline compared with estimates of a 2.5% contraction.

Exports of goods and services shrank 1.2% compared to the second quarter when they had risen by 2.3%. Net exports contributed to a 0.2 percentage point drop in GDP.

Japan’s shipments had seen contractions for four straight months since May as U.S. tariffs hurt exports, although September saw a rebound to growth. Tokyo in July clinched a trade deal with Washington, bringing down tariffs on its exports to the U.S. to 15% from 25%. The 15% tariffs took effect on Aug. 7.

Domestic consumption helped slow the economic contraction, with government and private consumption up 0.5% and 0.1%, respectively, compared to the second quarter. Public demand was a bright spot, growing 0.5% quarter on quarter and contributing 0.1 percentage point to the Japanese economy.

Private demand proved to be the largest drag on GDP this quarter, declining 0.4% compared to the quarter before and pulling the economy down by 0.3 percentage point, as residential investments plunged 9.4%.

Harumi Taguchi, principal economist at S&P Global Market Intelligence, said he expects GDP growth to rebound going forward, adding that the impact of new housing rules is expected to diminish. In 2024, Japan mandated stricter energy conservation standards for all new projects starting April 1 this year.

Taguchi said that easing uncertainties surrounding U.S. tariffs, as well as the agreement between Washington and Beijing to lower reciprocal duties appear to be influencing orders from Japan positively.

However, Tokyo’s relationship with its largest trading partner China has come under strain, after newly elected Prime Minister Sanae Takaichi reportedly said that a Chinese attack on Taiwan would be a “survival threatening situation” for Japan, potentially lead to a military response from Tokyo.

China has sharply criticized her remarks, also cautioning its citizens not to visit Japan. According to data from Japan’s National Tourism Organization, Chinese travelers have constituted the largest share of visitors to Japan in 2025 so far, at 22.8%