Tokyo: Japan’s economy is bracing for its first contraction in a year and a half, as newly imposed U.S. tariffs threaten to derail the nation’s fragile post-pandemic recovery. According to a Reuters poll of leading economists, Japan’s gross domestic product (GDP) is expected to have shrunk by an annualized 2.5 percent between July and September 2025. On a quarterly basis, the economy likely declined by 0.6 percent, marking the first setback after six consecutive quarters of moderate expansion.
The primary reason behind this downturn lies in a sudden drop in export performance. Japan’s trade sector, which has long served as a key pillar of its economic growth, was severely hit by the latest round of U.S. tariffs under President Donald Trump’s trade policy. In July, Washington raised import duties on Japanese goods to 15 percent, up from the previous 2.5 percent. This increase has made Japanese exports especially automobiles and industrial components significantly more expensive in the U.S. market, cutting into corporate profits and reducing export demand.
Economists say this policy shift has turned what was once a mild tailwind for Japan’s economy into a strong headwind. Net exports, which had previously contributed 0.3 percentage points to GDP growth in the second quarter, are now estimated to have dragged growth down by the same margin in the third quarter. This reversal highlights how sensitive Japan’s economy remains to external shocks, especially in its trade-dependent sectors.
Domestic demand also failed to offset the external weakness. Household consumption, which accounts for more than half of Japan’s GDP, showed almost no momentum, growing by a mere 0.1 percent during the quarter, compared to 0.4 percent in the previous period. With inflation eroding purchasing power and wage growth stagnating, Japanese consumers remain cautious about spending. Meanwhile, capital investment showed only a slight increase of 0.3 percent, suggesting that businesses are reluctant to commit to new projects amid rising uncertainty.
Analysts from SMBC Nikko Securities noted that the slowdown was almost inevitable given Japan’s strong performance earlier in the year and the new challenges presented by U.S. trade barriers. “The first half of 2025 saw a rebound in manufacturing and exports, but with the imposition of higher tariffs, that momentum has now reversed,” they said. “The economy was bound to correct itself under such pressure, at least for the short term.”
The upcoming release of official GDP data on November 17 will confirm whether Japan has officially entered a contraction phase. For policymakers, the data will present a critical challenge. The Bank of Japan (BOJ), which has been cautiously adjusting its ultra-loose monetary policy, now faces the difficult task of supporting growth without fueling further inflation. Inflation has been hovering near the 2 percent target, but real wage growth has not kept pace, leaving households squeezed.
Economists warn that unless Tokyo acts swiftly through targeted fiscal support or trade diplomacy, the impact of the U.S. tariffs could deepen Japan’s slowdown in the coming quarters. The country’s dependence on external trade, combined with global economic uncertainty, has left it vulnerable to shifts in foreign policy and market sentiment.
In essence, Japan’s economic troubles reflect the growing strain between trade-dependent economies and protectionist policies in major markets. The coming months will test whether Japan can balance its domestic recovery with a rapidly changing global trade environment or if it will slip further into an economic slump that could echo across Asia.