Japan's economy contracted in the third quarter of 2025 for the first time in one and a half years, according to a Reuters survey. The primary factor behind this downturn is attributed to new trade tariffs imposed by Donald Trump's administration. Economists surveyed expect Japan's GDP to have fallen by 2.5% year-on-year, following a gain of 2.2% in the second quarter. Adjusted for seasonal variations and annualized, the decline amounted to 0.6%.
The economic retreat is primarily linked to weakened external demand. Net exports, which had supported the economy in the second quarter, are estimated to have decreased their contribution to GDP by 0.3% in the third quarter due to declining exports resulting from US tariff policies.
Additional pressure stemmed from a reduction in investment activity. Notably, investments in residential construction have fallen, along with inventory levels. According to an analysis by SMBC Nikko Securities, the first half of the year showed abnormally high growth, making the current decline a necessary correction against the backdrop of new external trade restrictions.
Consumer spending remains weak. Estimates show that growth in this sector slowed to 0.1% in the third quarter, down from 0.4% in the second quarter, despite comprising over half of the country's GDP. Business capital expenditures remained stable, increasing by 0.3%, the same as in the previous quarter.
Under an agreement between Washington and Tokyo, the US established a 15% tariff on Japanese imports, which is lower than the initially proposed rates of up to 27.5% but still significantly above the previous 2.5%. The automotive industry has been particularly affected, as margins and export volumes are especially sensitive to changes in trade conditions.
Analysts warn that with real income stagnation and weak consumer activity, the Japanese economy may enter a prolonged phase of slowdown. Official GDP data will be released on November 17.
