Japan's economy shrinks on hit to exports — and US tariffs are at the center of it

Japan’s economy contracted at an annualised rate of 1.8% in the July-September period, government data showed on Monday. The downturn was driven largely by a steep decline in exports, which have been spiralling under the weight of President Donald Trump's tariffs.

On a quarter-by-quarter basis, Japan’s gross domestic product (GDP), which is the total value goods and services produced in the country, slipped 0.4%, marking the first contraction in six quarters, the Cabinet Office told news agency Associated Press (AP).

The annualised rate is a figure that shows what the economy would have done if the same rate were to continue for a year. Even though Japan's economy faced a contraction for the first time in six quarters, the decline was still smaller than the 0.6% drop the market had initially expected.

Decline in exports

A major decline during the July-September quarter could be witnessed in Japan's exports of goods and services, which shrank 1.2% compared to the second quarter, when they had risen by 2.3%. Net exports contributed to a 0.2 percentage point drop in GDP, news channel CNBC reported.

Some businesses had sped up exports when they could, attempting to beat the Trump tariffs kicking in, and inflating some of the previously recorded data for exports.

Japan’s shipments had seen a decline for four consecutive months since May as US tariffs hurt exports, although September saw a rebound to growth, CNBC reported.

On an annualised basis, exports dropped 4.5% in the three months through September. Imports for the third quarter fell 0.1%.

The key factor that helped to slow the economic contraction is domestic consumption. In this quarter, government and private consumption were up by 0.5% and 0.1%, respectively, compared to the previous quarter.

Public demand grew 0.5% quarter-over-quarter and contributed 0.1 percentage point to the Japanese economy, CNBC reported.

Tariff blow on Japan

Tariffs proved to be a major blow to Japan’s export-reliant economy, led by powerful automakers such as Toyota Motor Corp. However over the years, these manufacturers have moved their production to foreign countries in order to offset the blunt of tariffs.

Japan in July finalised a trade deal with the United States, bringing down tariffs on Tokyo's exports to Washington from 25% to 15%. The new tariffs were put into effect on 7 August, 2025.

Japan has also faced political uncertainty recently, until Sanae Takaichi became prime minister in October.