Japan’s economy shrank more than initially estimated in the third quarter, reinforcing Prime Minister Sanae Takaichi’s push for a sweeping stimulus package aimed at easing the strain of inflation and reviving growth. Revised government figures released Monday showed gross domestic product contracted at an annualized rate of 2.3% in the three months through September, compared with an earlier reading of 1.8%. The decline, reported by Bloomberg, marked Japan’s first economic contraction in six quarters and reflected weaker business investment and softer housing spending than previously thought.
The deeper-than-expected slump adds urgency to Takaichi’s ¥17.7 trillion ($114 billion) stimulus program unveiled last month, the largest fresh injection of government spending since the pandemic. The package includes tax cuts, utility subsidies and support for wage growth, particularly for small and midsize companies. The government estimates the measures will lift GDP by an average of roughly 1.4 percentage points per year for three years once fully implemented. With inflation continuing to erode household purchasing power, Takaichi is under pressure to show voters that cost-of-living conditions are improving — a political vulnerability that contributed to the downfall of her predecessors.
The weaker GDP reading arrives just days before the Bank of Japan’s policy meeting, adding complexity but not expected to shift the central bank off its cautious path of gradual tightening. Bloomberg Economics said the downturn is likely to be temporary, pointing to softer housing investment and a pullback following front-loaded exports ahead of US tariffs. Markets appear to agree: overnight-indexed swaps now imply nearly a 90% probability of a BOJ rate hike this month after Governor Kazuo Ueda signaled recently that higher borrowing costs are nearing.
Fresh data from the labor ministry underscored the challenge facing policymakers. Real wages fell 0.7% in October from a year earlier, the tenth straight month of decline, as inflation continued to outpace pay growth. Nominal wages rose 2.6%, with base salaries rising at the same pace, while a more stable measure for regular workers excluding bonuses and overtime climbed 2.2%, slightly weaker than the prior month. Japan’s primary inflation gauge has remained at or above the BOJ’s 2% target for more than three and a half years — the longest stretch since the early 1990s — complicating the delicate balance between supporting households and normalizing monetary policy.
