Japan’s economy contracts for first time in six quarters on US tariff hit

TOKYO - Japan’s economy contracted an annualised 1.8 per cent in the July-September quarter, the first fall in six quarters, due to a hit to exports from US tariffs, government data showed on Nov 17.

While that could complicate any central bank plan to raise its policy interest rate, the contraction was not as acute as expected by economists, who called it a temporary setback rather than the start of a recession.

“The contraction is largely due to one-time factors such as housing investment” affected by regulatory change, said Meiji Yasuda Research Institute economist Kazutaka Maeda.

“Overall, the economy lacks strong underlying momentum, but the trend still points to a gradual recovery over the next year or two,” he said.

The contraction in gross domestic product, which followed revised growth of 2.3 per cent in the previous quarter, was narrower than a median market estimate of 2.5 per cent in a Reuters poll.

The third-quarter reading translated into a quarterly contraction of 0.4 per cent, narrower than the median estimate of 0.6 per cent.

Exports were the main drag as the impact of higher US tariffs intensified.

Automakers saw shipment volume plunge, reversing earlier front-loaded exports ahead of tariff hikes, although they mostly absorbed tariff costs by cutting export prices.

Net external demand, or exports minus imports, knocked 0.2 of a percentage point off growth, versus a 0.2 point positive contribution in the April-June period.

The United States formalised a trade agreement with Japan in September, implementing a baseline 15 per cent tariff on nearly all Japanese imports, down from the initial 27.5 per cent on autos and a 25 per cent duty threatened for most other goods.

Housing investment also weighed on growth as tighter energy efficiency regulations introduced in April started to bite.

Private consumption, which accounts for more than half of economic output, rose 0.1 per cent, matching a market estimate.

But that cooled from the 0.4 per cent rise in the second quarter, indicating that high food costs kept households reluctant to spend.

Capital spending, a key driver of private demand-led growth, rose 1 per cent in the third quarter, versus a rise of 0.3 per cent in the Reuters poll.

Many private sector analysts expect growth to rebound in the October-December quarter, with a Japan Centre for Economic Research poll of 37 economists projecting a 0.6 per cent expansion.

The weak GDP data comes as new Prime Minister Sanae Takaichi’s government is compiling a stimulus package to cushion the blow to households from the rising living costs.

Close economic advisers to Ms Takaichi have cited a likely sharp GDP contraction as a reason for aggressive stimulus measures. The latest data could embolden those advisers to call for the Bank of Japan to go slow in raising interest rates, analysts say. REUTERS