GDP Contraction: Overseas Risks Should Be Assessed Carefully

Editorial

14:29 JST, November 18, 2025

Japan’s economy, which had been on a gradual recovery path, has contracted for the first time in six quarters. It is crucial to carefully assess overseas risk factors and realize an economy that is driven by domestic demand.

The preliminary estimate for real gross domestic product in the July-September quarter of 2025 contracted by an annualized 1.8% compared to the previous quarter. This was largely due to a drop in automobile exports to the United States following the high tariffs imposed by the administration of U.S. President Donald Trump in April.

Total exports of goods and services fell 1.2%, marking the first such decline in two quarters. Companies notably advanced exports in anticipation of the tariff rate hike. The decline in exports during the July-September quarter likely reflects a strong rebound effect from this front-loading.

The Japanese economy has been in a phase of gradual recovery for over five years since the COVID-19 pandemic. Although growth has contracted in the short term, financial markets widely expect a return to positive territory from October.

However, vigilance remains essential. Personal consumption, which accounts for over half of GDP, grew sluggishly at only 0.1%. Wage increases have failed to keep pace with rising prices, resulting in a prolonged trend of contraction in real wages since spring 2022. Close attention should be paid to the persistent tendency toward a savings-oriented mindset.

There is also concern that the impact of the high U.S. tariff policy could linger. Furthermore, a deterioration of Japan-China relations is feared in connection with Prime Minister Sanae Takaichi’s Diet remarks regarding a Taiwan contingency and a “survival-threatening situation.” There is also the possibility of a decline in inbound tourists from China.

Both the public and private sectors must analyze these risk factors and devise countermeasures.

Amid increasing global economic uncertainty, it is crucial to boost domestic demand through such measures as expanding investment and revitalizing consumption.

In autumn 2023, the government announced a policy shift to transform the nation’s economy, which had been overly focused on cost cutting, into a “growth-oriented economy” driven by both wage and investment increases. In spring 2024, the Bank of Japan ended its negative interest rate policy, marking the advent of an “economy with positive interest rates.”

The Japanese economy now stands at a critical juncture in advancing to a new stage. Companies must continue their efforts to raise wages ahead of next spring’s labor-management wage negotiations.

Positive corporate sentiment is also evident. Capital investment has remained robust, marking a 1.0% increase over the quarter for the fourth consecutive quarter of growth.

Amid labor shortages, investment in labor-saving software is said to have performed well. Productivity improvements and corporate growth are essential to secure the funds for wage increases.

Measures to stimulate the corporate appetite for investment, such as “strategic investments that enhance resilience against potential crises,” will be included in a comprehensive economic stimulus package to be compiled by the government soon. The package should urge companies to adopt a proactive stance.

(From The Yomiuri Shimbun, Nov. 18, 2025)