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Japan’s preliminary 3Q GDP contracted -1.8% qoq saar, partially reversing the 2.3% expansion in 2Q. The print was close to DBS’s forecast of -1.6% and notably better than the consensus estimate of -2.4%. Private consumption held up despite elevated living costs, rising 0.6% in 3Q. Private non-residential investment also surprised to the upside with a solid 4.2% increase. As expected, exports weakened, reflecting the impact of the US reciprocal tariffs implemented in August.
The stronger-than-expected 3Q results keep full-year GDP growth of around 1% within reach, with growth of about 0.5% anticipated in 2026. The Takaichi government’s forthcoming fiscal stimulus should help ease living-cost pressures, bolster consumption, and support investment in strategic industries. Export performance may also stabilize as tariff rates fall under the US-Japan trade deal, non-US trade partners remain resilient, and global AI demand continues to lift semiconductor shipments.
Risks from political tensions with China remain manageable for now. Following Prime Minister Takaichi’s remarks on Taiwan, China advised its citizens to avoid travel to Japan and signaled potential retaliatory measures. Immediate economic impact is limited: while Chinese tourists account for about 20% of arrivals, tourism contributes only around 1.4% of Japan’s GDP. Risks could rise if China broadens restrictions, such as consumer boycotts, adding Japanese companies to entity lists, or tightening rare-earth export controls.
JPY rates: The better-than-expected 3Q GDP print supports the case for a 25 bps BOJ rate hike at the December/January policy meeting. The recent escalation in China-related tensions has not meaningfully altered the rate-hike outlook. The government’s fiscal stimulus package and the October CPI (due Friday) will be key inputs for assessing the timing of the next move.
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