Japan’s economy contracted for the first time in more than a year during the July-to-September quarter, as tariffs imposed by the Trump administration began to weigh on the exports of one of the United States’ top trading partners.
The quarterly decline of 1.8 percent was the first year-over-year drop in growth in six quarters. Japanese exports fell 1.2 percent during the period, driven by a slump in automobile and parts shipments, a sector acutely affected by higher U.S. duties.
In July, Japan reached a trade agreement with the United States, which, in exchange for a pledge to invest $550 billion in the U.S. economy, resulted in a 15 percent blanket tariff on Japan’s exports — a rate lower than initially threatened but still damaging.
“Fifteen percent is better than expected, but this is going to hurt regardless,” said Stefan Angrick, a senior economist at Moody’s Analytics in Tokyo. The momentum in Japanese exports earlier this year, when firms front-loaded purchases to pre-empt higher tariffs, “is certainly fading,” he said.
The economic contraction in Japan is the latest indicator of how President Trump’s trade policies are disrupting the global economy and placing pressure on dozens of the United States’ top trade partners.
As Chinese automakers gain ground in their domestic market and developing regions of the world, the United States has been one of the few global markets where Japan could still reliably send high-value exports, such as Toyotas and automotive components, Mr. Angrick said. “That’s not the case anymore,” he said.
As domestic firms, particularly auto manufacturers, shift into cost-saving mode, Mr. Angrick cautioned, weaker exports could have a ripple effect on the economy, potentially leading to slower job creation, reduced investment and more modest wage increases. For Japan, “it’s kind of hard to see a way out of this,” he said.
Another drag on Japan’s overall economic performance has been private consumption, which has struggled amid persistent high prices for necessities such as food and energy. Private consumption was roughly flat in the July-to-September quarter, up 0.1 percent from the previous year.
Under the new prime minister, Sanae Takaichi, Japan’s government is drafting a supplemental budget aimed at bolstering the economy. The budget is expected to be submitted to Parliament before the end of the year.
Beyond immediate relief measures — including subsidies to assist households with the rising cost of living — the budget is likely to incorporate investments in key growth sectors, such as artificial intelligence, semiconductors and shipbuilding.
In the months ahead, Mr. Angrick said, trade metrics may improve from the recent quarterly dip, given that the distortion from the front-loading of exports is likely to subside. The remaining question is to what extent sustained U.S. tariffs will depress Japan’s long-term growth trajectory, Mr. Angrick and other economists say.
Signs of fragility in the Japanese economy are also likely to hinder the Bank of Japan’s ability to raise interest rates above their current rock-bottom level of 0.5 percent. Recently, expectations that the central bank would raise rates within the current year have largely faded.
Even with the planned government spending, given the continued weakness in private consumption and the persistent risks to exports, “the sluggish state of the Japanese economy is unlikely to change,” Takahide Kiuchi, the executive economist at Nomura Research Institute, wrote in a recent note.
