Japan’s Economy Shrinks 0.4% in Q3, Less Than Expected

Japan’s economy fell 0.4% in the third quarter of 2025 compared with the previous three months, showing a smaller decline than economists expected. The drop was less than the 0.6% fall predicted by a Reuters poll, as higher government and household spending helped limit the slowdown.

On a yearly basis, Japan’s GDP fell 1.8%, compared with an estimated 2.5% drop. Exports fell 1.2%, after rising 2.3% in the second quarter. The decline in trade lowered total growth by 0.2 percentage points.

Domestic spending gave some support. Government consumption rose 0.5%, while private spending increased slightly by 0.1%. But private demand overall was weaker, dropping 0.4%, mainly because of a 9.4% fall in housing investment.

Economist Harumi Taguchi from S&P Global Market Intelligence said growth may improve in the coming months as the impact of new housing rules fades. He also said easing trade tensions between the U.S. and China could help Japanese exports.

However, ties between Tokyo and Beijing have become strained after Prime Minister Sanae Takaichi said that a Chinese attack on Taiwan would be a “survival-threatening situation” for Japan. China criticized her remarks and warned its citizens against visiting Japan.

China remains Japan’s largest source of tourists, making up 22.8% of all visitors this year, according to official data.