Expected 0.2% Contraction in Japanese Consumption Weighs on Third-Quarter Growth
Key Facts
Japan is on track to record a contraction in private consumption in the third quarter, with a 0.2% decline expected, while Reuters estimates point to economic growth slowing to 0.3% on an annualized basis. That would mark the first drop in consumption in seven quarters, according to a Reuters poll of 16 economists. Private consumption accounts for more than half of Japan’s GDP, making its trajectory a key factor in assessing the economy from July to September. Capital expenditure, meanwhile, is expected to grow 1.5% after falling 0.9% in the second quarter. The preliminary GDP estimate is due on November 16 and will show how much weaker household demand weighed on overall growth.
The weak-consumption outlook puts domestic demand at the forefront of third-quarter indicators, after GDP expanded 1.4% in the second quarter. The Reuters poll estimates quarter-on-quarter growth, not annualized, at 0.1% in the third quarter, alongside annualized growth of 0.3%. The difference between the two readings indicates a limited expected pace of quarterly expansion before annualization. The expected growth mix is not limited to consumption: it also includes a likely rebound in capital investment after a decline in the previous quarter. But consumption’s share of more than half of GDP makes its expected contraction an important gauge of domestic demand strength.
Analysts at SMBC Nikko Securities attributed the expected weakness in consumption to a decline in durable goods due to policy-related factors, and weaker non-durable goods under inflationary pressure. Services consumption, by contrast, remained resilient from July to September, they said. The analysts wrote that "services consumption was resilient in July and September," while durable goods contracted and non-durable goods weakened. The divergence offers a picture of demand that is not easing at the same pace across its components, with services holding up as goods face different pressures. The analysts link the weakness in non-durable goods to inflation’s negative impact, without discounting the resilience of services.
Foreign trade adds another drag to quarterly growth estimates: the Reuters poll forecast that exports minus imports would subtract 0.4 percentage points from GDP growth in the third quarter. Net external demand had added 0.5 percentage points in the second quarter, according to the poll. Analysts said its contribution is likely to turn negative as imports rise alongside progress in securing alternative sources of crude oil. The third-quarter estimates therefore combine an expected contraction in private consumption with a negative contribution from foreign trade. On the other hand, expected growth in capital expenditure stands out as a supporting component in these estimates.
The Bank of Japan’s October outlook places the demand reading within a broader economic trajectory. The bank expects moderate growth to continue at a slower pace in fiscal 2026, followed by a gradual increase in the growth rate from fiscal 2027. It links the expected improvement to the fading negative effects of higher energy and raw material prices. On prices, it expects consumer price inflation, excluding fresh food, to exceed 2% clearly before easing toward 2% in the second half of the forecast period. The outlook combines slower near-term growth with inflation remaining clearly above 2% during part of the forecast period. GDP data are due next on November 16 at 8:50 a.m. Japan time, according to the schedule cited in the Reuters poll.