Japan’s economy contracted by 0.4 percent in the July-to-September quarter, official figures released on Monday show, marking the country’s first quarter-on-quarter decline since Q1 2024. The result, though better than market expectations of a 0.6 percent drop, comes at a moment when newly installed Prime Minister Sanae Takaichi is preparing a large-scale stimulus package to shore up growth and confidence.
The preliminary, seasonally-adjusted figure also reflects a slowdown in what had been moderate growth: the April-to-June quarter was revised upward to 0.6 percent from the earlier 0.5 percent. With Takaichi’s government in place since October, and with expectations high that it will approve a stimulus package in the vicinity of “well above” ¥17 trillion (Japanese yen), the contraction underscores the urgency of action.
The data from the Cabinet Office of Japan point to weak residential investment as a drag on growth, while exports showed signs of rebound in September on a monthly basis. As noted by economist Ryutaro Kono of BNP Paribas, the negative growth reading “isn’t particularly serious” given that export-sector business conditions remain solid, corporate willingness to invest in equipment continues and US tariff pressures have not yet undermined the export cycle.
Nevertheless, deeper structural risks are flagged. Analyst Marcel Thieliant from Capital Economics warns that heightening tensions between Japan and China — notably after Takaichi’s remarks on Taiwan and collective self-defence — could escalate into a full-blown trade dispute. Were Beijing to restrict exports of rare‐earth elements or target Japanese exports, sectors such as automotive could feel outsized strain amid rising competition from Chinese electric-vehicle manufacturers.
Japan and China, despite being major trading partners, have a fraught diplomatic and territorial history, and the recent diplomatic summons reflect heightened bilateral strain. For Japan, which negotiates a complex global supply-chain and export environment, any disruption in trade flows carries not only immediate cost but also longer-term strategic implications.
Against this backdrop, Prime Minister Takaichi’s stimulus plan takes on critical importance. According to media reports, Finance Minister Satsuki Katayama signalled that the package under preparation would “well exceed” ¥17 trillion, and that cabinet approval was expected imminently. Analysts view the stimulus as a necessary step to counter downside risks, but some caution that without addressing structural headwinds — demographic decline, weak household consumption, and global trade volatility — the “stop‐gap” nature of fiscal boost may not suffice for sustained recovery.
Japan’s economy faces a delicate moment: growth momentum is faltering just as government change brings fresh impetus and with global risks gathering. With export recovery visible but investment and consumption stalling, the next moves by Tokyo will be closely watched by markets and global trade partners alike.
