Japan’s Q3 GDP shrinks 1.8%. Tariffs hit exports, contraction milder than expected – recap | investingLive

Japan’s economy contracted for the first time in six quarters, shrinking an annualised 1.8% in Q3 as U.S. tariffs hit exports and regulatory changes dampened housing investment. While the downturn complicates the Bank of Japan’s path toward further policy tightening, economists stressed the decline was milder than expected and likely temporary. The median forecast had anticipated a 2.5% fall.

Quarterly GDP slipped 0.4%, compared with expectations of a 0.6% drop, following a strong 2.3% expansion in Q2. Export weakness was the main drag: net external demand shaved 0.2 percentage points off growth as automakers saw shipment volumes reversed after earlier front-loading to avoid tariff hikes. Companies largely absorbed the new baseline 15% tariff by cutting export prices, softening—though not preventing—the pullback.

Housing investment also acted as a headwind as new energy-efficiency rules introduced in April reduced construction momentum. Private consumption grew just 0.1%, matching expectations but slowing from 0.4% in Q2, with elevated food prices curbing household spending.

Capital expenditure was a rare bright spot, rising 1.0% and outperforming the 0.3% market expectation, suggesting firms are still investing despite a weak demand backdrop. Many private forecasters expect a rebound in Q4, with a Japan Center for Economic Research survey projecting 0.6% growth.

The GDP miss arrives as Prime Minister Sanae Takaichi’s government prepares a stimulus package aimed at offsetting rising living costs. Analysts say the weaker data will bolster arguments for both fiscal support and for the BOJ to take a more cautious approach to any further rate hikes.

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The softer-than-expected contraction limits immediate BOJ tightening risks while reinforcing expectations for sizeable fiscal support — mildly yen-negative and supportive for Japanese equities.