Japan’s GDP and the case for stimulus
Japan’s third-quarter GDP slipped more than expected, sharpening the new administration’s argument for fresh fiscal stimulus and adding pressure on the Bank of Japan to move cautiously on tightening. The contraction was driven largely by a sharp housing pullback and softer exports, while underlying domestic demand remained resilient. By Ahmed Azzam | @3zzamous | 17 November 2025.
Key figures and drivers
- GDP contracted at a 1.8% annualized pace, milder than feared.
- Housing investment plunged as new environmental rules kicked in, with a 9.4% quarter-on-quarter drop that shaved 1.4 percentage points off headline growth.
- Exports also softened after front-loaded shipments ahead of US tariffs, contributing another point to the GDP decline.
- Consumption and corporate capex remained solid, indicating domestic demand resilience.
“Weakness strengthens the case for fiscal support and a slower BOJ normalization path.”
The downturn was driven overwhelmingly by a collapse in residential investment, while external demand weakened. The headlines suggest a softer contraction than markets anticipated, reinforcing the debate in Tokyo over fiscal and monetary policy directions.
Policy implications
The new administration is expected to use the setback to reinforce its case for additional fiscal support, while the Bank of Japan faces renewed pressure to ease its pace of normalization and avoid over-tightening.
Context
The economy shrank at an annualized pace of 1.8%, versus consensus forecasts of –2.4%. The housing sector’s decline was the primary drag on growth, with stricter environmental standards affecting construction activity.
Overall, the data suggest resilience in consumer spending and capital expenditure by firms, but the housing market weakness and softer exports have underscored the need for stimulus and a cautious approach from monetary policymakers.
Author and date
By Ahmed Azzam | @3zzamous | 17 November 2025