Japan’s economy contracts for first time in six quarters on tariff hit

TOKYO: Japan’s economy shrank an annualised 1.8% in the July-September quarter, the first contraction in six quarters, due to a hit to exports from US tariffs, government data showed on Monday.

While that could complicate any central bank plan to raise its policy interest rate, the contraction was not as acute as expected by economists who called it a temporary setback rather than the start of a recession.

“The contraction is largely due to one-time factors such as housing investment” affected by regulatory change, said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

“Overall, the economy lacks strong underlying momentum, but the trend still points to a gradual recovery over the next year or two,” he said.

The contraction in gross domestic product, which followed revised growth of 2.3% in the previous quarter, was narrower than a median market estimate of 2.5% in a Reuters poll.

The third-quarter reading translated into a quarterly contraction of 0.4%, narrower than the median estimate of 0.6%.

Exports were the main drag as the impact of higher US tariffs intensified.

Automakers saw shipment volume plunge, reversing earlier front-loaded exports ahead of tariff hikes, although they mostly absorbed tariff costs by cutting export prices.

Net external demand, or exports minus imports, knocked 0.2 of a percentage point off growth, versus a 0.2 point positive contribution in the April-June period.

The US formalised a trade agreement with Japan in September, implementing a baseline 15% tariff on nearly all Japanese imports, down from the initial 27.5% on autos and 25% for most other goods.

Housing investment also weighed on growth as tighter energy-efficiency regulations introduced in April started to bite.

Private consumption, which accounts for more than half of economic output, posted growth of 0.1%, matching a market estimate.

That was cooler than the 0.4% rise of the second quarter, indicating that high food costs were making households reluctant to spend.

Capital spending, another key driver of private demand-led growth, rose 1.0% in the third quarter, far exceeding a market estimate of 0.3%.

Many private-sector analysts expect growth to rebound in the October-December quarter, with a Japan Center for Economic Research poll of 37 economists projecting a 0.6% expansion.

The weak GDP data comes as Prime Minister Sanae Takaichi’s government is compiling a stimulus package to cushion the blow to households from rising living costs.

Close economic advisers to Takaichi have cited a likely sharp GDP contraction as a reason for aggressive stimulus measures.

The latest data could embolden those advisers to call for the BOJ to go slow in raising interest rates, analysts said.