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Japan's economy has recorded a contraction for the first time in six quarters, mainly driven by declining overseas shipments as a result of newly imposed US trade duties.

G7 Economic Leaderboard

The Japanese economy has become the initial G7 nation to report an economic contraction in the previous quarter.

With the US yet to release its GDP data for Q3 2025, the present Group of Seven growth standings indicate:

• The French economy: 0.5 percent quarterly growth
• United Kingdom: +0.1%
• Canada: 0.1 percent (preliminary figure)
• German economy: 0%
• Italian economy: no growth
• Japan: negative 0.4 percent

Tourism Shares Slump amid Diplomatic Dispute with Beijing

In addition to the economic contraction, Japan is facing an growing political dispute with China regarding Taiwan.

Shares in Japan's travel and retail firms have dropped sharply after China urged its residents to refrain from traveling to Japan.

This action by Beijing intensified a diplomatic feud that was initiated by statements from Japan's recently appointed PM about the possibility of sending troops in the event of a hypothetical Chinese invasion on Taiwan.

The situation led to a wave of sell-offs across Japan's leisure shares.

• Oriental Land shares fell by 5.7 percent
• Isetan Mitsukoshi plummeted by 11.3 percent
• The national carrier declined by 3.75 percent

"The ongoing tension over Taiwan and Beijing's travel warning discouraging visits to Japan introduces short-term headwinds for consumer-facing sectors.

"Tourists from China represent roughly 25% of Japan's international visitors, making retail outlets, high-end shopping, and hospitality especially at risk."

Economic Contraction Breakdown

Japan's gross domestic product declined by 0.4 percent in the July-September quarter, as manufacturers' exports were hit by duties imposed by the United States recently.

Overseas shipments were a primary factor of the contraction, dropping by 1.2% compared with the April-June quarter, and were 4.5 percent lower than a year ago.

Previously, the American government had threatened Japan with a new 25% tariff on its goods, which was later lowered to 15 percent when the two countries reached a trade deal.

Private demand also fell, by 0.3 percent compared to the previous quarter.

On an annual basis, Japan's GDP contracted by 1.8 percent in the quarter through September.

"The Japanese economic situation was solid in the first half of this year and today's GDP figures showed that momentum is halted for now.

I expect Japan's economy to be returning on a moderate growth trend going forward."

The US administration has lately recognized the impact of tariffs on US consumers, lowering tariffs on imported food products including meat, tomatoes, beverages and bananas amid increasing concerns about increasing costs.

Business Agenda

• 08:00 Greenwich Mean Time: Swiss GDP report for Q3
• 15:00 Greenwich Mean Time: US construction spending data for August