Japan's Economy Contracts 1.8% Annualised in Q3 2025, First Decline in Six Quarters, as US Tariffs Bite
Japan's GDP shrank 0.4% quarter on quarter in July–September 2025, an annualised decline of 1.8% and the first contraction in six quarters, according to Cabinet Office data reported by Nikkei Asia. Economists attributed the downturn partly to US tariffs and weak consumer spending. The Bank of Japan held its policy rate at 0.5% through most of 2025 before hiking to 0.75% in December, the highest since 1995.
Japan's economy contracted in the third quarter of 2025 for the first time in six quarters, with gross domestic product falling 0.4% from the previous three months — an annualised decline of 1.8% — according to Cabinet Office preliminary data reported by Nikkei Asia. The contraction reversed the 1.0% annualised expansion recorded in the April–June quarter and undershot economists' expectations.
Key data
- Q3 2025 (Jul–Sep) GDP: −0.4% quarter on quarter, −1.8% annualised
- First contraction in six quarters
- Q2 2025 (Apr–Jun): +1.0% annualised, beating forecasts
- Q4 2025 (Oct–Dec): +0.2% annualised, below expectations
- Full-year 2025 real GDP growth: +1.1%
- Bank of Japan policy rate: held at 0.5% through most of 2025, raised to 0.75% on 19 December 2025 — highest since 1995
Causes of the contraction
Economists attributed the downturn to a combination of weakening US tariff measures on Japanese exports and soft domestic consumption. Japan's export-dependent economy was particularly vulnerable to the escalation of US trade barriers during 2025, with the effective US tariff rate reaching 19.5% by late August — the highest since 1933. Consumer spending remained subdued as real wage growth failed to keep pace with persistent inflation, which the Bank of Japan's Outlook Report put at approximately 2.2–2.4% for fiscal 2025.
Bank of Japan response
The BOJ kept its policy rate unchanged at 0.5% — the level set in January 2025 — through most of the year, citing "high uncertainty" surrounding the global trade outlook. Governor Kazuo Ueda signalled openness to further action but stressed a data-dependent approach. On 19 December 2025, the central bank raised rates to 0.75%, the highest level in thirty years, as wage growth and domestic price pressures convinced a majority of the board that the economy could withstand tighter monetary conditions. The BOJ's Outlook Report forecast fiscal 2025 real GDP growth of approximately 1.1% and core inflation of 2.2–2.4%.
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