Japan's economy experienced a 0.4% contraction in the third quarter of 2025, marking its first GDP dip since the first quarter of 2024. This development coincides with the leadership of Prime Minister Sanae Takaichi, who assumed office in October and is now spearheading a new stimulus package. The quarter-on-quarter GDP reading exceeded market predictions of a 0.6% decline, yet the contraction still stands as a notable shift. The preliminary, seasonally adjusted data indicates a 0.6% growth for the April to June quarter, which has been revised upwards from an earlier estimate of 0.5%. Takaichi's government is actively working on a substantial stimulus package, with Finance Minister Satsuki Katayama hinting at a value surpassing 17 trillion yen ($110 billion). The cabinet's approval of the package is anticipated for Friday. Despite the negative growth, BNP Paribas economist Ryutaro Kono suggests that the third-quarter decline isn't a cause for immediate alarm. Kono attributes the rebound in exports during September to the resilience of the export sector, despite US tariff hikes, and maintains that corporate investment in equipment remains robust. However, the ongoing tensions with China over Takaichi's comments regarding Taiwan could potentially escalate into a trade dispute. Marcel Thieliant from Capital Economics warns that these tensions might lead to China restricting Japanese exports, particularly in the rare earths sector, which could significantly impact car manufacturers already facing challenges from Chinese electric vehicle producers. Takaichi's stance on Taiwan, expressed in November, suggests that an armed attack could trigger the deployment of troops to the island under 'collective self-defence'. The historical relationship between China and Japan, marked by territorial disputes and military spending, often faces strain due to these tensions. The cabinet office's data also highlights weak residential investment as a factor hindering economic growth. A significant development occurred in July when trade officials secured a deal with the United States, resulting in a reduction of tariffs on Japanese goods from 25% to 15%. This reduction, however, only came into effect in mid-September, impacting the overall economic performance.
