The Spillover of the 2025 U.S. Government Shutdown on Japan’s Economy

― “Invisible Contagion through Finance, Trade, and Expectations” ―

(Prepared by Chief Economist – Global Macro Research Division, October 2025)

Ⅰ. Overview: From Washington Gridlock to Global Repercussion

The U.S. government shutdown that began on October 1, 2025, marks the most politically charged fiscal paralysis since 2018–19.
Roughly 1.6 million federal employees and contractors face furloughs or delayed pay, and public data collection has largely ceased, creating a “policy fog.”

While direct fiscal drag on U.S. GDP is estimated around –0.1% per week, the true impact lies in its global spillovers—particularly through exchange rates, financial flows, and trade expectations.
For Japan, the consequences will not appear as a single shock, but as a network of secondary effects, transmitted through multiple macroeconomic channels.

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Ⅱ. Transmission Framework: Three-Layer Spillover Model

We model Japan’s exposure through a three-tier structure:

Tier	Channel	Core Mechanism	Japanese Exposure
1st Order	U.S. macro slowdown	GDP contraction, federal spending halt	↓ Japanese exports, ↓ business orders
2nd Order	Financial & currency markets	USD volatility, risk-off capital flows	↑ yen, ↓ Japanese equities
3rd Order	Expectation & policy alignment	Confidence, investment, BOJ response	↓ capital expenditure, ↓ consumption confidence

Each layer amplifies the next—creating a ripple cascade rather than a single-point impact.

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Ⅲ. First-Order Channel: Real-Sector Shock via Trade and Investment

1. Export Dependence and Sector Sensitivity

• The U.S. accounts for 17.8% of Japan’s total exports, second only to China.
• Export elasticity to U.S. demand ≈ 0.35 (i.e., a 1% fall in U.S. GDP reduces Japan’s export volume by 0.35%).
• With shutdown-driven growth losses (–0.3 to –0.5% over Q4 2025), Japan’s export volume may contract by –0.1 to –0.2%, equivalent to a ¥400–700 billion output loss.

2. Sector-Level Vulnerabilities

Sector	Exposure Mechanism	Risk Level
Automobiles	U.S. dealerships delay procurement due to fiscal uncertainty	★★★★☆
Electronics & Semiconductors	Federal/defense procurement halted, tech inventories rise	★★★★☆
Machinery & Construction Equipment	Infrastructure contracts suspended (USD1.3bn exposure)	★★★☆☆
Pharmaceuticals & Biotech	FDA approval delays, NIH research halt	★★★☆☆
Services & Tourism	U.S. consumer travel & education spending decline	★★☆☆☆

Source: METI Export Sensitivity Index (2025Q2), JETRO survey data.

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Ⅳ. Second-Order Channel: Financial and Exchange Rate Contagion

1. Dollar-Yen Dynamics

• Historically, during U.S. shutdowns, the USD/JPY pair appreciates (yen strengthens) by an average of 1.5–2.5% within three weeks.
• Market consensus sees USD/JPY near ¥143–146 in late October (vs. ¥150 pre-shutdown).
• The yen acts as a “safe-haven proxy”, attracting capital when U.S. data vanish and uncertainty rises.

Impact on Japan:

• A 2% yen appreciation trims Japan’s nominal GDP by –0.15% and corporate profits by –0.3%, concentrated in exporters.
• Listed firms with USD-dominated revenues (Toyota, Sony, Keyence, Murata) face a ¥50–70 billion valuation adjustment each quarter under such shifts.

2. Capital Flow Rotation

• Risk-off sentiment drives funds from emerging markets and cyclical equities into JGBs and yen assets.
• This may suppress long-term JGB yields temporarily (–2 to –5 bps), but increase volatility.
• Portfolio rebalancing by U.S. institutions (especially pension and ETF redemptions) could trigger short-term outflows from Japanese equities.

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Ⅴ. Third-Order Channel: Expectations, Policy, and Behavioral Economics

1. Confidence and Corporate Behavior

• U.S. political paralysis reinforces a global narrative of “fiscal dysfunction”, eroding business sentiment.
• The Tankan DI (large manufacturing), now at +13, could decline toward single digits if the shutdown extends beyond 5 weeks.
• Firms delay capital spending decisions—especially in export-led and dollar-sensitive sectors.

2. BOJ and Government Policy Response

• Bank of Japan (BOJ) faces a policy dilemma:
  • Yen appreciation tightens financial conditions;
  • Yet further easing risks destabilizing FX expectations under global volatility.
• The Cabinet Office may accelerate supplementary fiscal measures, possibly advancing the FY2026 stimulus budget (¥5–7 trillion scale) to offset export softness and consumer sentiment decline.

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Ⅵ. Quantitative Spillover Scenarios

Scenario	U.S. Shutdown Duration	Japan GDP Impact	FX Path (USD/JPY)	Nikkei 225	Policy Reaction
S1 – Short Shutdown (2 wks)	Limited furlough, quick resolution	–0.05%pt	148→146	–1% correction	None (watch mode)
S2 – Medium (4–5 wks)	Broader data gap, consumer drag	–0.15%pt	150→144	–3% correction	BOJ verbal intervention, fiscal offset
S3 – Prolonged (7–8 wks)	Federal default risk priced	–0.3%pt	152→142	–6–8%	Coordinated G7 liquidity signal
S4 – Extreme (9+ wks)	Institutional breakdown	–0.5%pt	155→138	–10%+	BOJ easing + MoF FX stabilization fund

Assumptions: U.S. GDP loss 0.3–0.8% (CBO/JP Morgan estimates); multiplier = 0.3; yen elasticity to U.S. risk = –0.4.

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Ⅶ. Strategic Assessment: Medium-Term Implications for Japan

1. Currency Polarization Intensifies
   – Yen may regain “safe-haven” status, attracting temporary inflows.
   – However, prolonged U.S. political dysfunction erodes confidence in the dollar-based order, amplifying yen volatility.
2. Export-Led Growth Model Faces Test
   – Japan’s dependence on U.S. demand highlights the vulnerability of its recovery phase.
   – Diversification toward ASEAN and India becomes macro-prudent strategy.
3. Policy Coordination Becomes Crucial
   – Fiscal policy (Cabinet Office) and monetary policy (BOJ) must act in tandem.
   – A unified communication strategy—similar to the 2020 pandemic response—could anchor expectations and prevent self-fulfilling pessimism.
4. Financial Market Signal Effects
   – Japanese institutional investors may rebalance portfolios toward domestic fixed income.
   – Yen carry trades unwind partially, tightening offshore liquidity—an echo of 2013 “taper tantrum” dynamics.

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Ⅷ. Conclusion: The Invisible Contagion

The 2025 U.S. shutdown underscores a paradox:

“Fiscal paralysis in Washington can export uncertainty faster than it exports goods.”

For Japan, the immediate hit is modest, but the cumulative effect through trade, capital, and expectations could shave 0.2–0.5 percentage points off annualized GDP if the standoff persists beyond a month.

In an economy still balancing between deflation inertia and structural reform, the shock’s danger lies less in its scale than in its timing—arriving just as Japan begins to rebuild policy credibility under new leadership.

In essence, Japan’s challenge is to absorb imported instability without importing pessimism.
That requires strategic clarity, calm communication, and a disciplined macro policy mix—anchored in resilience, not reaction.

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Author:
Chief Economist – Japan & Global Markets Division
October 2025