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Japan’s economy shrank at a slower pace than analysts anticipated in the third quarter of 2025, with fresh GDP data showing that steady business investment helped cushion weak consumer spending. According to Monday’s release, Japan’s GDP fell 1.8% year-on-year for the September quarter, outperforming forecasts of a 2.5% decline. Still, the reading marked a reversal from the revised 2.3% growth seen in the previous quarter.
On a quarterly basis, GDP slipped 0.4%, slightly better than predictions of a 0.6% drop. The figure also contrasted with the 0.5% quarter-on-quarter expansion recorded earlier this year. Economists widely expected the downturn as Japan continued to contend with sticky inflation, soft private consumption, and persistent pressure on exporters facing elevated U.S. trade tariffs.
Despite a recently negotiated trade agreement between Tokyo and Washington, major Japanese exporters—particularly automakers—remained exposed to U.S. duties. This contributed to a 0.2% quarter-on-quarter contraction in external demand. However, stronger capital expenditure offered a bright spot. Large corporations increased investment in domestic infrastructure and modernization efforts, pushing overall capital spending up by 1%, compared to the previous quarter’s 0.8% rise.
This improvement helped offset sluggish private consumption, which managed just a minimal 0.1% increase. Persistent inflation, limited wage growth, and ongoing trade challenges continued to weigh on household spending through Q3.
Attention is now shifting toward policy direction under new Prime Minister Sanae Takaichi, who is expected to roll out fresh fiscal stimulus to support economic momentum. Meanwhile, traders have trimmed expectations of near-term interest rate hikes by the Bank of Japan, citing fragile economic conditions and growing political resistance. Capital Economics analysts said the latest GDP figures suggest the BOJ will likely hold rates steady in December, though sticky inflation could still prompt a rate hike as early as January.
