TOKYO – Japan’s economy contracted at an annualized rate of 1.8 percent in the July-September quarter, marking the first decline in six quarters, as exports were hit by US tariffs, government data showed on November 17.

Although this could complicate any plan by the central bank to raise interest rates, economists said the contraction was not as severe as expected and considered it a temporary setback rather than the start of a recession.

Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, said the contraction was largely due to one-time factors, such as housing investment affected by regulatory changes. He added that while the economy lacks strong underlying momentum, the trend still points to gradual recovery over the next year or two.

The contraction in gross domestic product followed revised growth of 2.3 percent in the previous quarter and was narrower than the median market estimate of 2.5 percent in a Reuters poll. The third-quarter reading corresponded to a quarterly contraction of 0.4 percent, slightly better than the median estimate of 0.6 percent.

Exports were the main drag, as the impact of higher US tariffs intensified. Automakers saw shipment volumes drop, reversing earlier front-loaded exports ahead of tariff hikes, although most absorbed tariff costs by cutting export prices. Net external demand, calculated as exports minus imports, subtracted 0.2 percentage points from growth, compared with a 0.2 point positive contribution in the previous quarter. The United States formalized a trade agreement with Japan in September, implementing a baseline 15 percent tariff on nearly all Japanese imports, down from the initial 27.5 percent on autos and the previously threatened 25 percent on most other goods.

Housing investment also weighed on growth, as tighter energy efficiency regulations introduced in April began to take effect. Private consumption, which accounts for more than half of economic output, rose 0.1 percent, matching market expectations. However, this was lower than the 0.4 percent increase in the previous quarter, suggesting high food costs kept households cautious about spending.

Capital spending, an important driver of private demand-led growth, increased by 1 percent in the third quarter, compared with a 0.3 percent rise expected in the Reuters poll.

Many private sector analysts expect growth to rebound in the October-December quarter, with a poll of 37 economists by the Japan Centre for Economic Research projecting a 0.6 percent expansion.

The weak GDP data comes as Prime Minister Sanae Takaichi’s government prepares a stimulus package to help households cope with rising living costs. Close economic advisers to Takaichi have cited a likely sharp GDP contraction as a reason for aggressive stimulus measures. The latest data could support calls for the Bank of Japan to slow down interest rate hikes, analysts said.