Global trade barriers and increasing expenses lead to Japan's initial economic downturn after six consecutive quarters of growth

Japan's economy shrank by 1.8% on an annualized basis in the third quarter of 2025, ending a streak of six consecutive quarters of growth. This downturn highlights increasing threats to the country's recovery as it faces both international trade disputes and rising domestic costs

. Although the decline was not as steep as the 2.5% drop predicted by analysts , it reversed the 2.3% expansion seen in the previous quarter and has raised doubts about the Bank of Japan’s (BOJ) capacity to keep its loose monetary stance.

, the slowdown stemmed from a 0.4% quarterly drop in GDP. Private consumption, which makes up the largest share of Japan’s economy, edged up by only 0.1% following a 0.4% increase in the second quarter . Exporters struggled with U.S. tariffs, which reduced the positive impact of net trade, while business investment stayed strong, . The BOJ, which has indicated it may consider more rate increases, now faces the challenge of supporting growth as economic momentum slows.

The economic contraction stands in contrast to the results of some Japanese companies. Nexon Co., a major player in the online gaming industry,

, reporting ¥118.7 billion in revenue and a 61% year-on-year jump in sales from its MapleStory game. The company also revealed it would double its year-end dividend to ¥30 per share, signaling confidence in its ability to generate cash. Nexon’s performance demonstrates that certain industries, especially those driven by digital innovation, remain resilient despite broader economic challenges.

Experts caution that the GDP contraction could make it harder for Japan to achieve sustainable growth. The nation’s heavy dependence on exports leaves it exposed to shifts in global trade,

—including a sweeping 15% tariff—are now being fully implemented. At the same time, domestic spending is being held back by ongoing cost increases, such as higher prices for food and energy.

The BOJ’s future policy decisions may depend on whether this downturn proves to be a short-term issue or points to more fundamental problems. While the 1.8% annualized decrease in Q3 was less severe than some had feared, the government’s recent stimulus actions—including rice subsidies and energy price support—might need to be broadened to prevent a deeper slump.

Currently, attention is centered on

since the first quarter of 2024. With global markets preparing for tighter U.S. monetary policy and ongoing geopolitical risks, the BOJ’s upcoming decisions could influence not only Japan’s outlook but also the stability of the wider region.