Japan's economy grew by a mere 0.1% quarter-on-quarter in the fourth quarter of 2025, narrowly avoiding a technical recession after reversing a 0.7% contraction in the third quarter. However, the gross domestic product (GDP) figure fell short of the 0.4% growth forecast by economists. On an annualized basis, Japan's output increased by 0.2% in Q4 2025, missing the expected 1.6% growth, while output in the previous quarter declined by 2.3%. A technical recession is typically defined as two consecutive quarters of contraction. Following the data release, the Nikkei 225 index opened 0.12% higher, but the yen depreciated by 0.25% against the US dollar.
A detailed breakdown shows that private consumption, which accounts for more than half of Japan's economic output, rose by 0.1% in the fourth quarter, matching market expectations. However, this figure represents a slowdown from the 0.4% growth recorded in the previous quarter. Capital expenditure, a key driver of growth from private demand, also increased at a sluggish pace of 0.2% in Q4, compared to a survey forecast of 0.8%. Net external demand—exports minus imports—contributed neither positively nor negatively to growth. Exports saw a slight decline after the United States officially imposed a 15% baseline tariff on almost all Japanese imports.
Commenting on the situation, economist Kazutaka Maeda of Meiji Yasuda Research Institute noted, "The impact of the tariffs appears to have peaked between July and September, but based on the latest performance, businesses may continue to adopt a cautious stance to some extent in the future."
The clearly weaker-than-expected Q4 GDP performance poses a significant challenge for Prime Minister Sanae Takaichi's government, as cost-of-living pressures continue to weigh on market confidence and domestic demand. This month, Takaichi's ruling party secured an overwhelming victory in the election. Following the win, Takaichi stated last Monday, February 9, that she would promote investment through proactive fiscal policies to support economic growth, including targeted public spending in key areas related to economic security.
Maeda pointed out, "The latest data clearly indicate that the momentum of economic recovery is not strong enough. Consumption, capital expenditure, and exports—areas where we had anticipated growth—have all fallen short of expectations." Some economists expect Japan's economy to continue expanding modestly in the coming months, but the weakness in the fourth quarter suggests that a full-fledged recovery still faces obstacles.
Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting, stated, "Whether the economy can achieve sustainable growth actually depends on whether real wages can firmly return to positive growth. In this sense, the outcome of this year's wage negotiations in the coming months will be crucial." Kobayashi also mentioned that the GDP report is unlikely to influence the Bank of Japan's monetary policy decisions. He noted, "Interest rate hikes by the central bank will not lead to economic stagnation. The Bank of Japan's focus will likely be on how to manage inflation."