Japan's Economy Experiences Unexpected Contraction in Q3 2025

Economic Performance Overview

Japan's economy contracted for the first time in six quarters, with GDP declining by 1.8% year-on-year in Q3 2025. On a quarterly basis, the economy shrank by 0.4% during the July-September period. This contraction was less severe than market expectations, primarily supported by government consumption.

Demand Dynamics

Public demand remained the economy's silver lining, growing 2.2% annually driven by government spending. In contrast, private demand faced significant challenges, declining by 1.8% due to a substantial drop in residential investment, which plummeted by more than 32%. This sharp decline in investment had a considerable impact on overall economic performance.

Sectoral Analysis

The government's continued spending helped mitigate the economic downturn. However, the private sector struggled with reduced investment activities, particularly in the residential sector. This disparity between public and private sector performance highlights the current economic challenges Japan is facing.