By Max Sato
In its monthly report for September released Monday by the Cabinet Office, the government maintained its overall tone, saying the economy is “recovering at a moderate pace, although the effects of the U.S. trade policy are seen mainly in the auto industry.”
The last part was tweaked slightly from the previous statement that said the trade effects were seen “in some areas.” The official assessment was last upgraded in August 2024 and downgraded six months earlier.
In July Tokyo and Washington agreed to lower the “reciprocal” tariff rate to 15% on most U.S. imports of Japanese goods including automobiles and auto parts (50% on iron/steel and aluminum for security reasons), down from Trump’s original plan to slap 25% duties on Japan, but the figure is still much higher than the 2.5% rate imposed by the United States before the second Trump administration.
In its near-term outlook, the government repeated its recent statement, saying, “The improvement in the employment and income conditions and the effects of various (fiscal) policies are expected to support a moderate recovery while the impact of the U.S. trade policy needs a close watch.”
“In addition, the effects of continued price increases on private consumption through a downturn in consumer sentiment are also downside risks to the Japanese economy,” it warned. The government repeated the need to keep a close watch on “fluctuations in the financial and capital markets.”
The latest Q2 GDP data released on Sept. 8 showed that Japan’s shaky economic growth turned out to be more robust than estimated earlier, up 0.5% on quarter (revised up from a preliminary 0.3% rise), or an annualized 2.2% (vs. the initial reading of 1.0%). It is the fifth straight quarterly expansion, recovering from three consecutive quarters of contraction through January-March 2024.
In the revised data, domestic demand pushed up total domestic output by 0.2 percentage point, instead of pushing it down by 0.1 point, as private sector inventories trimmed the Q2 GDP by a fractional 0.0 point, much smaller than the preliminary estimate of 0.3 point. External demand added an unrevised solid 0.3 point, backed by modest export growth and a pullback in imports.
The Q2 GDP growth followed a slight 0.1% rise q/q (+0.3% annualized) in January-March. In the preliminary Q2 report released in August, the Q1 performance was revised up from the previous estimate that it posted the first contraction in four quarters with a slight 0.04% dip (-0.2% annualized).
Looking ahead, many economists predict a setback in the July-September quarter when the drag from U.S. trade rows and slowing U.S. demand is set to cause Japan’s GDP to contract by an annualized 1.1% before partially rebounding by 0.4%.
Officials vowed to “continue taking all possible measures” to cushion the impact of the Trump tariffs.
The government repeated that with the Bank of Japan it “will continue to work closely together to conduct flexible policy management in response to economic and price developments.” It expects the BOJ “to achieve the price stability target of 2% in a sustainable and stable manner, while confirming the virtuous cycle between wages and prices, by conducting appropriate monetary policy in light of economic activity, prices and financial conditions.”
At its Sept. 18-19 meeting, the Bank of Japan’s nine-member board, as widely expected, decided in a 7 to 2 vote (two from the financial industry) to maintain the target for the overnight interest rate at 0.5% for the fifth straight meeting after hiking it by 25 basis points (0.25 percentage point) in January.
Board members Hajime Takata and Naoki Tamura both called for raising the target for the overnight interest rate by 25 basis points (0.25 percentage point) to 0.75%.
Hajime Takata, formerly with Mizuho securities, argued that the bank’s 2% price stability target had been largely met. Naoki Tamura, formerly with SMBC, urged central bank to tick policy rate up closer to what is considered to be neutral to economic activity amid rising inflation risk.
In response, at a post-meeting news conference on Sept. 19, Governor Kazuo Ueda repeated his view that underlying inflation is “still slightly under 2%” but that it is “getting closer” to the bank’s target.
On Tamura’s proposal, Ueda agreed the upside risk to price rises “does exist as one of the risks” but stressed, “In my view, since there is a possibility that the effects of the U.S. trade policy among other things will emerge further, I think we have to keep in mind that there are downside risks to the economy and through that (channel), there are downside risks to prices.”
Ahead of the bank’s next policy meeting on Oct. 29-30, Ueda’s remarks indicate that the board is in no rush to raise rates further in the absence of data to show how the global and domestic economies are coping with the Trump tariffs in the July-September quarter onwards (Japan’s preliminary Q3 GDP is not available until Nov. 17).
The political landscape is also unknown at this point. The ruling conservative Liberal Democratic Party will elect its new leader who will replace the outgoing Prime Minister Shigeru Ishiba who has stepped down to take the blame for leading the ruling coalition to lose a majority, first in the all-important lower house in October and then in the upper house in July.
The BOJ board also decided in a unanimous vote to start a gradual process of selling off its massive holdings of exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs) “as soon as it is ready” as part of unwinding of excess monetary easing.
The BOJ will try to “avoid incurring losses and disturbing the markets as much as possible,” reflecting the way it adopted for selling off shares (finished in July) at an annual pace of roughly Y150 billion, or Y620 billion at market value, and limiting each transaction sum to 0.05% of total trading values.
As for the ETFs, the annual selling amount would be about Y330 billion, or Y620 billion at market value, and that for the J-REITs are estimated to be some Y5.5 billion, or Y5.5 billion at market value.
Governor Ueda projected that it would take “more than 100 years” to complete the process if the BOJ were to sell all those of these asset holdings.
The government repeated that the U.S. growth rate is “slowing” and the pace of pickup in the eurozone remains “moderate.” Tokyo continues to view the Chinese economy as “pausing” even though there is an increase in supply thanks to the effects of policy measures. Japan now sees India as “expanding,” its first upgrade in 15 months thanks to the South Asian country’s reliance on technology and business services exports (about 50% of its total exports) that is cushioning the impact of Trump tariffs.
Key points from the monthly report:
The government upgraded its assessment of private consumption that accounts for about 55% of the GDP for the first time in 13 months, simply saying that it is “showing signs of a pickup.” Previously, it sounded more cautious by describing that the consumption was “showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is slow to recover.”
The core measure (excluding housing, motor vehicles and remittance) rose a modest 0.2% on the year after rising 0.4% in June.
The government continues to term industrial production as “flat.”
In the latest data to be released on Sept. 30, Japan’s industrial production is forecast to post its second straight drop, down 0.9% on the month in August, following a 1.2% slip (revised up from -1.6%) as U.S. trade rows with the rest of the world are taking their toll on global and domestic growth. That would be a seventh fall in 12 months.
August trade data sent out an alarming signal that Japanese export volumes marked their first year-on-year dip in five months, down 3.9%. Export values were nearly flat, down 0.1%, for the fourth consecutive decline.
The monthly survey by the Ministry of Economy, Trade and Industry released last month indicated that output would slump 1.7% in August and slip a further 0.3% in September. Last month, the ministry maintained its assessment, saying industrial output is “taking one step forward and one step back.”
The monthly survey by the Ministry of Economy, Trade and Industry released last month indicated that output would output would slip 1.0% in July before rising 0.8% in August, led by production machinery as well as iron/steel and non-ferrous metals.
The government maintained its assessment of exports after downgrading it for the first time in 12 months in its July report, saying they are “largely flat.” Previously, exports were “showing signs of a pickup.”
Japanese export values dipped 0.1% in July, posting their fourth straight year-on-year drop. Japanese carmakers are reducing the prices for U.S. customers to cover high Trump import tariff costs, exerting downward pressures on overall export prices, and now the volumes were also down. The decline in export values was led by autos, iron/steel and auto parts as seen in recent months.
Import values slumped 5.2% for the second consecutive drop in light of lower prices for crude oil and liquefied natural gas.
The trade balance came to a deficit of ¥242.5 billion following a revised ¥118.44 deficit in July. It compared with a ¥711.44 billion deficit in August 2024.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
Private consumption is “showing signs of a pickup” vs. “showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is slow to recover” (the first upgrade in 13 months; last upgraded in August 2024; downgraded in February 2024).
Business investment in equipment and software is “picking up moderately” vs. “showing signs of a pickup” (the first upgrade in 18 months; last upgraded in March 2024; downgraded in November 2023).
Housing construction “has a weak undertone” in payback for rush starts before tighter clean energy rules took effect on April 1 (unchanged; upgraded in August 2024; downgraded in August 2025).
Public investment is “solid” (unchanged; upgraded in August 2025; downgraded in October 2024).
Exports are “largely flat” (unchanged; upgraded in February 2025; downgraded in July 2025).
Imports are “showing signs of a pickup” (unchanged; upgraded in May 2025; downgraded in February 2025).
Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).
Corporate profits are “pausing among some firms in the face of the effects of the U.S. trade policy” (unchanged; upgraded in March 2025; downgraded in August 2025).
Business sentiment is “largely flat” (unchanged; upgraded in December 2023; downgraded in April 2025).
The pace of increase in bankruptcies is “largely flat” (unchanged; upgraded in January 2025; downgraded in January 2023).
Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).
Domestic corporate goods prices are “showing a slower pace of increase” (unchanged; last changed in August 2025).
Consumer prices are “rising” (unchanged: last changed in November 2024).