Tokyo, Japan skyline with the Tokyo Tower
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Japan’s economy contracted by a smaller-than-expected 1.8% in the third quarter on an annualized basis, with growth in private and government consumption limiting the decline.
On a quarter-on-quarter basis, GDP in the three months to September contracted for the first time in six quarters, falling 0.4%, government data released Monday showed.
The fall in growth, however, was softer than Reuters poll estimates of a 2.5% annualized contraction and a 0.6% sequential drop.
Public demand grew 2.2% annualized, supported mostly by government consumption, while private demand fell 1.8%, dragged lower by a more than 32% drop in residential investments.
Exports shrank 4.5% in the third quarter on an annualized basis and 1.2% compared to the second quarter when they had risen by 2.3%.
The yen weakened marginally against the dollar, while the Nikkei 225 was down 0.29%. Yields on 10-year Japanese government bonds inched up 3 basis points to 1.73%.
Japan’s exports had seen contractions for four straight months since May as U.S. tariffs hurt shipments, 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%, effective 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 growth 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.
The weak quarterly growth is likely to bolster Japan’s newly elected Prime Minister Sanae Takaichi’s plans to stimulate the economy.
Japan’s government has reportedly called for “bold and strategic” investment in crisis management and growth areas in its upcoming stimulus package by Takaichi’s administration.
Citing a draft, Reuters reported that “Japan’s government will pledge to increase spending ‘without hesitation’ to support an economy on the cusp of emerging from stagnation.” The government will also promote investment in “key growth areas,” including artificial intelligence, semiconductors and shipbuilding.
Earlier this month, Nikkei reported that the package was over 10 trillion yen ($64.63 billion), including subsidies for electricity and gas bills, as well as help for small and medium companies to help increase wages.
