Japan's Economic Contraction Sparks Stimulus Discussion

Japan's economy contracted by an annualized 1.8% in the July-September quarter due to exports hit by U.S. tariffs. While this contraction poses challenges for potential interest rate hikes, it is seen as temporary. Economists expect gradual recovery, supported by potential stimulus measures to counter rising living costs.

Japan's economy faced a setback in the July-September quarter, shrinking by an annualized 1.8%. This marks the first contraction in six quarters, primarily due to export disruptions from U.S. tariffs, according to government data released on Monday. Despite these challenges, the contraction was less severe than economists anticipated.

Economist Kazutaka Maeda from Meiji Yasuda Research Institute highlighted that the decline was influenced by temporary factors, such as changes in housing investment regulations. Despite lacking strong momentum, the economy is anticipated to gradually recover over the next couple of years, Maeda suggested.

The contraction was prompted by reduced exports, with automakers witnessing a significant downturn. However, private consumption showed a slight increase, and capital spending exceeded market expectations. As Prime Minister Sanae Takaichi's government prepares a stimulus package, advisers point to the need for cautious interest rate adjustments by the BOJ.

(With inputs from agencies.)