1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 86
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Japan’s economy contracted at an annualized 2.3% quarter-over-quarter pace in 3Q25, ending a
five-quarter expansion and marking a clear loss of momentum. The decline reflected inventory
payback after earlier accumulation, softer household consumption, and a renewed drag from net
exports as imports rebounded with prior domestic demand. While the headline figure was
striking, the composition points to cyclical volatility rather than a structural break in growth.
External demand paused amid global uncertainty, and domestic demand proved insufficient to
fully offset the drag.
Japan’s economy contracted in 3Q25 amid weak investment and a drag from net exports
5.0%
QoQ SAAR
2.5%
0.0%
-2.5%
-5.0%
4Q24
1Q25
2Q25
Private consumption
Private res inv.
Private non-res inv
Public demand
Net exports
Real GDP
3Q25
Inventory chg
Source: Economic and Social Research Institute Japan, Bloomberg Finance LP, Scotia Wealth Management
Forward-looking indicators suggest stabilization heading into 2026. Purchasing manager indices
indicate manufacturing activity is bottoming out, while services remain firmly expansionary.
Tankan business sentiment surveys show improving conditions across several manufacturing
subsectors – such as electrical machinery and transport equipment – alongside continued
firmness in non-manufacturing. This constellation of indicators is consistent with an economy
experiencing a temporary pause rather than a sustained downturn. As inventory effects fade and
fiscal support takes hold, we expect modest sequential improvement into early 2026. Our
baseline remains for real GDP growth of 1.1% in 2025, slowing to 0.8% in 2026 as cyclical tailwinds
diminish.
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