Yen softness aids exports but hurts households

Japan’s Q3 2025 GDP fell 0.3% q/q (annualized –1.1%), marking the first contraction in five quarters. Consumer spending dropped 1.4%, driven by higher energy costs after subsidy expirations and stagnating real wages. While exports rose modestly, domestic demand remained the primary drag.

Private consumption, accounting for more than half of GDP, remains vulnerable to cost pressures. Nominal wages grew 2.1% y/y, but inflation of 2.5% eroded purchasing power. The unemployment rate edged up to 2.8%, while retail sales growth decelerated to 0.8%. The yen’s weakness to 151/USD buoyed exporters but amplified import costs for households and small firms.

The macro-policy backdrop is delicately balanced. Fiscal stimulus worth JPY 13.2 trillion continues to support public works and defense spending, yet bond yields hit 1.08%, testing the Bank of Japan’s flexible yield-curve control. Market expectations for gradual policy normalization have firmed as inflation expectations remain anchored near 2%.

Equities responded mildly. The Nikkei 225 (TYO:N225) eased 0.4%, with Toyota (TYO:7203) and Sony (TYO:6758) higher on currency leverage, offset by retail losses in Aeon (TYO:8267). Investors interpret the data as cyclical softness rather than renewed stagnation, given firm export and capex trends.

Structurally, Japan’s challenge lies in translating corporate profitability into wage-led consumption. Corporate cash holdings exceed JPY 520 trillion, yet labor’s income share remains below 55% of GDP. The government’s “New Capitalism” agenda aims to shift incentives via tax breaks for wage hikes and productivity-linked pay.

If nominal wages grow above 3% in 2026 while inflation stabilizes near 2%, Japan could regain real income growth and sustain 1–1.2% annual GDP expansion. Otherwise, the pattern of policy dependence and demographic drag will persist, constraining potential output near 0.8%.