GDP growth decelerates less than expected in Q3

Slowdown priced in: GDP growth moderated to 0.9% in seasonally adjusted annualized rate terms (SAAR) in the third quarter from 2.2% in the second. The slowdown had been anticipated after disruptions from extreme weather in August, but it was less sharp than had been expected by the market, boosting the chance of a rate hike at the Bank of Japan’s next meeting on 18–19 December. On an annual basis, economic activity bounced back, increasing 0.3% in Q3, contrasting the previous period's 1.1% decrease and marking the best result since Q4 2023.

Net trade drags: The slowdown was driven by a sharper decline in net exports, as a weaker yen inflated the value of imports. The growth of exports of goods and services waned to 1.5% in Q3 (Q2: +10.7% SAAR), dwarfed by imports of goods and services growth, which remained elevated despite waning to 8.5% in Q3 (Q2: +12.2% SAAR). Economic momentum was also weighed on by fixed investment growth waning to 1.2% in Q3, contrasting the 6.6% increase recorded in the previous quarter. On the other hand, private consumption improved to 3.6% SAAR in the third quarter, which marked the best reading since Q2 2022 (Q2: +2.6% SAAR) and was likely due to a temporary tax cut introduced earlier in the year. Meanwhile, public spending accelerated to a 2.0% expansion in Q3 (Q2: +0.3% SAAR).

GDP growth to underperform ahead: After picking up in Q4 2024, GDP growth is then projected by our panelists to decelerate, dipping below 1% throughout 2025 and languishing behind the Euro area and the United States. With catch-up growth from the pandemic largely exhausted, persistently high inflation will begin to eat into household purchasing power and therefore consumer spending. Growth of fixed investment and exports is also expected to slow, further dampening momentum. That said, growth over 2025 as a whole should significantly improve from 2024’s projected average. According to the Bank of Japan, risks to the outlook are balanced, though downside risks have grown in recent weeks, with Donald Trump’s upcoming U.S. presidency threatening higher tariffs and placing further pressure on the yen, in turn raising inflation and the import bill.

Panelist insight: Analysts at Fitch Solutions added on risks to the outlook: “We estimate that if Trump does impose a 10% US universal tariff in Q2 2025, growth would be 0.2 percentage points lower in 2025. Trump could also force Japan to tighten restrictions on semiconductor equipment exports to China, which despite restrictions imposed in 2023 is still a key export market for the sector.”

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