Modest rebound after prior contraction
Japan’s economy expanded by 0.1% in the fourth quarter of 2025 compared with the previous three months, marking a return to growth after a 0.7% contraction in the third quarter. While the figure prevented a technical recession — typically defined as two consecutive quarters of decline — it fell short of market expectations for a 0.4% increase.
On an annualized basis, gross domestic product rose just 0.2%, significantly below forecasts of 1.6% and following a sharp 2.3% annualized drop in the prior quarter. Compared with the same period a year earlier, output edged up 0.1%, easing from a 0.6% annual gain in the third quarter.
Data from the Cabinet Office showed that private consumption provided the main support for growth, helping to offset weaker exports and softer public spending. The subdued external environment continues to weigh on trade-dependent sectors.
Markets react cautiously
Following the release, the Nikkei 225 opened slightly higher, gaining 0.12%. The yen weakened 0.25% to 153.06 per dollar, reflecting tempered expectations for aggressive monetary tightening.
The Bank of Japan recently upgraded its economic outlook. In January, the central bank raised its growth forecast for the fiscal year ending March 2026 to 0.9% from 0.7%, and lifted its fiscal 2026 projection to 1% from 0.7%. Policymakers expect moderate expansion supported by improving global demand, steady government stimulus, and accommodative financial conditions.
Inflation has moderated but remains above target. Consumer prices slowed to 2.1% in January, the lowest since March 2022, although inflation has exceeded the BOJ’s 2% goal for 45 consecutive months.
Trade and investment in focus
The growth figures arrive as Tokyo advances talks with Washington over a $550 billion investment commitment tied to the bilateral trade agreement. According to public broadcaster NHK, both sides are still finalizing initial projects linked to the pledge.
Economy Minister Ryosei Akazawa has expressed hope that concrete initiatives will be announced before Prime Minister Sanae Takaichi meets U.S. President Donald Trump. That meeting follows Takaichi’s strong electoral mandate in the recent Lower House election.
Takaichi has signaled support for expansionary fiscal policy, including record public spending of 122 trillion yen for the fiscal year beginning April 1. She has also pledged temporary food tax relief and higher defence spending equivalent to 2% of GDP.
Defence and industrial policy as catalysts
Market strategists suggest defence and industrial policy could drive the next phase of equity gains. Analysts point to potential joint initiatives between Japanese and U.S. firms in manufacturing, automation, and shipbuilding. A recent U.S. policy document emphasized rebuilding maritime capacity with cooperation from Japan and South Korea.
As policymakers attempt to balance growth support with price stability, Japan’s economy appears to be stabilizing, albeit at a modest pace. The coming months will test whether fiscal stimulus, external partnerships, and domestic demand can sustain a broader recovery.
