Gross domestic product fell at an annualised pace of 2.3% in the third quarter, as revised figures showed business spending and housing investment came in weaker than preliminary figures. The contraction was deeper than the initial reading of a 1.8% fall and was the first in six quarters.
The lacklustre results back up Takaichi’s stimulus package, which featured the largest fresh spending since the pandemic. With a contraction confirmed at the start of her tenure, the data could give ammunition for Takaichi to keep spending in the future, as private consumption remains weak and other parts of the economy lack momentum.
The data add an element of complexity to the Bank of Japan’s upcoming policy decision later next week but likely won’t derail it from its gradual hiking path.
“It’s possible that Takaichi could use the recent economic slowdown to justify a large-scale stimulus package,” said Uichiro Nozaki, an economist at Nomura Securities Co. But given Japan’s output gap is almost at zero, it will be difficult for Takaichi to keep using the economy as a reason to spend, he added. “After this temporary dip, I still think that the economy will return to positive growth from the next quarter.”
To ease the burden of inflation on households, Takaichi unveiled a stimulus package featuring ¥17.7 trillion (US$114 billion) in planned fresh spending. Outlays from the package include price-relief steps such as utility subsidies and tax cuts, as well as wage-support measures aimed largely at helping smaller firms.
The government estimates that the package will lift the nation’s GDP by an average of about 1.4 percentage points per year on an annualised basis for three years, assuming the measures take effect during that span.
Easing the inflationary hit on households is key for Takaichi, whose predecessors have been ousted from office partly due to simmering discontent over the cost of living.
“Japan’s deeper third-quarter downturn will bolster Prime Minister Sanae Takaichi’s case to step up fiscal stimulus but won’t stop the Bank of Japan from lifting rates at the Dec 18-19 meeting. The BOJ is likely to look through softness in the GDP data, judging declines in housing construction and exports will be temporary. We don’t think the recovery has suffered a significant setback,” said economist Taro Kimura.
Meanwhile, overnight-indexed swaps now indicate around a 90% chance of the central bank hiking this month, following Governor Kazuo Ueda’s strong hints last week that an increase in borrowing costs is coming soon.
Ueda explicitly said that the bank would consider raising interest rates at the upcoming meeting, echoing language he used ahead of the last hike in January.
BOJ officials are ready to raise rates next week, provided there’s no major shock to the economy or financial markets in the meantime, according to people familiar with the matter.
“The BOJ really should have raised rates in autumn, so it’s a bit behind now,” said Ayako Fujita, chief Japan economist at JPMorgan Securities. “Just because one quarter’s data showed slight negative growth doesn’t mean governor Ueda will have a hard time explaining a rate hike in December.”
Monday’s revised GDP figures incorporate additional data that became available after last month’s initial report, including capital spending from the Finance Ministry’s corporate survey.
The ministry’s report last week showed that companies cut investment for the first time in six quarters during the summer, partly due to uncertainty over US President Donald Trump’s tariffs. Monday’s figures showed business investment fell 0.2% from the prior quarter, down from the 1% growth in the initial estimate.
Net exports also remained lacklustre, partly from the impact of US tariffs, while domestic private consumption did little to offset overall weakness, growing only 0.2%. Inflation continues to outpace wage growth, eroding household purchasing power.
Separate labour ministry data on Monday showed real wages fell 0.7% from the previous year in October, the 10th straight month of decline.
While nominal wages rose 2.6% and base salaries climbed at the same pace in a sign of sustained pay momentum, the pace is still slower than inflation.
A more stable measure, which avoids sampling issues and excludes bonuses and overtime, climbed 2.2% for regular workers, slowing slightly from the previous month.
Japan’s main inflation gauge has remained at or above the BOJ’s 2% target for more than three and a half years, marking the longest streak since the early 1990s.
Looking ahead, several risks cloud the outlook, including a renewed bout of yen weakness. The currency is hovering around 155 per dollar, contributing to inflation and weighing on private consumption.
Recent tensions between Japan and China also pose a threat to tourism and trade. Goldman Sachs’ Japan economists estimate that the number of tourists from mainland China and Hong Kong to Japan could be cut in half, dragging on Japan’s growth by about 0.2 percentage points.
“For the last quarter of the year, there could be a negative impact on tourism spending from the situation with China, while Trump’s tariffs could also weigh on external demand,” said Keiji Kanda, senior economist at Daiwa Institute of Research.
“That said, with the expected improvement in earnings, consumption should slowly expand. Overall we’ll lack major strength, but economic recovery should continue.”