Despite reversing the deep contraction of the previous quarter, Japan's economic growth in the fourth quarter of 2025 still fell far below market expectations. This weak performance provides support for Prime Minister Kishi Sanae, who advocates for expansionary fiscal policy, while also putting the Bank of Japan's interest rate hike path to the test.
Data released by the Cabinet Office of Japan on Monday showed that the preliminary real GDP quarter-on-quarter growth rate for the fourth quarter of last year was 0.1%, lower than the market expectation of 0.4% and down from -0.7% in the previous quarter. On an annualized quarter-on-quarter basis, the preliminary GDP for the quarter recorded only 0.2%, far below the expected 1.6%, barely halting the 2.6% contraction in the third quarter. Detailed data showed that consumer spending increased slightly by 0.1%, capital expenditure grew by 0.2%, and net exports contributed zero to growth.
Despite the growth falling short of expectations, analysts believe that this is still insufficient to shake the Bank of Japan's plans for an interest rate hike later this year. The return of the economy to a growth range itself provides room for the central bank to continue tightening monetary policy, although the recovery is moderate.
<h2>Weak Growth in Consumption and Investment</h2>
From the detailed data, private consumption, which accounts for more than half of GDP, only increased by 0.1% in the fourth quarter, significantly slowing from the 0.4% growth in the third quarter. Although companies have been continuously raising wages in recent years, rising food prices have put pressure on household spending, leading to a year-on-year decline in real wages on average for the entire year of 2025.
Capital expenditure also showed weak performance, growing only by 0.2%, far below the 0.8% expected in a Reuters survey. Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting, pointed out:
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&#34;Rising interest rates and wage growth may pose a double risk to small and medium-sized enterprises, thereby restricting their capital expenditure capacity.&#34;
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Exports showed a mixed performance. In the fourth quarter, exports fell by 0.3%, a smaller decline compared to 1.4% in the previous quarter, indicating that the initial impact of tariffs has gradually been digested, but inbound tourism has been hit hard.
Influenced by Kishi Sanae's remarks last November, our country issued a travel warning for trips to Japan, leading to a significant decline in the number of tourists from China in the fourth quarter. According to Xinhua News Agency, Ouyang An, director of the Tokyo Tourism Office, stated that Kishi Sanae's recent erroneous remarks have had a substantial impact on cultural and tourism exchanges between China and Japan. As the Chinese government issued travel and study reminders and warnings, airlines also gradually introduced free cancellation and change policies, reducing the willingness of Chinese tourists to visit Japan.
<h2>Bank of Japan's Interest Rate Hike Path Under Test</h2>
Despite the fourth quarter GDP growth falling far short of expectations, analysts believe that this is still insufficient to shake the Bank of Japan's plans for an interest rate hike later this year.
Moody's Analytics economist Stefan Angrick expects that the Bank of Japan will make its next interest rate hike in July. However, he also warned that if subsequent growth data does not show significant improvement, the rationale for further rate hikes will face challenges. Since the interest rate hike in December last year, the Bank of Japan has maintained the policy interest rate at a 30-year high of 0.75%
Takeshi Minami, chief economist at Nomura Research Institute, holds a cautious stance on recent actions. He pointed out:
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&#34;Although GDP has achieved positive growth, the momentum is weak, and given the need to assess the impact of the interest rate hike in December, the likelihood of further rate increases in the short term seems to have diminished.&#34;
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<h2>Suga's Expansionary Fiscal Plan Gains Support</h2>
Weak fourth-quarter GDP data provides more support for Suga's implementation of expansionary fiscal policy following his victory in this month's election. The Liberal Democratic Party secured two-thirds of the seats in the House of Representatives in this election, marking the largest victory for a single party in post-war elections, ensuring the smooth passage of the new fiscal year's budget in April.
According to Bloomberg, Suga is considering accelerating discussions on whether to temporarily abolish the food sales tax and has promised to compensate for the corresponding tax losses without relying on deficit bonds. Capital Economics economist Marcel Thieliant noted:
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&#34;Weak economic activity increases the likelihood of Suga pushing for a suspension of the food sales tax, and it cannot be ruled out that she will formulate a supplementary budget in the first half of the new fiscal year.&#34;
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Japan's Economic Minister, Shunichi Suzuki, reiterated the official stance, stating that &#34;the economy continues to recover moderately,&#34; and expressed that moderate growth is expected to be supported as the effects of various policies become evident and employment and income conditions improve.
<h2>Market Reaction is Cautious</h2>
Following the release of the weak GDP data, the Japanese market reacted moderately overall. Bond futures rose slightly, indicating that investors are reassessing the outlook for the Bank of Japan's monetary policy. The stock market, however, showed weakness, with the Nikkei index closing down 0.14% at 56,860.75 points.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/006816fe-c1e1-489a-b477-4464a5c23fce.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/006816fe-c1e1-489a-b477-4464a5c23fce.png"/>
Kobayashi, an economist at Mitsubishi UFJ Research and Consulting, holds a cautious view on consumption prospects. He warned that while export goods seem to have bottomed out, inbound service exports are turning negative, which is concerning. He pointed out:
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&#34;Personal consumption shows some resilience, but whether this resilience can be sustained depends on whether price relief measures can take effect and whether real wages can return to positive growth.&#34;
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Looking ahead, economists expect the Japanese economy to continue expanding at a gradual pace. A survey by the Japan Center for Economic Research this month showed that 38 economists predict an average annualized GDP growth of 1.04% in the first quarter and 1.12% in the second quarter

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Japan's actual GDP in the fourth quarter of last year grew at an annualized quarter-on-quarter rate of only 0.2%, far below the expected 1.6%, with both consumption and investment remaining sluggish. The data supports the expansionary fiscal policy promoted by Governor Haruhiko Kuroda. Although the return to economic growth leaves room for the central bank to raise interest rates this year, the moderate pace of recovery has cooled recent expectations for action

- Despite a reversal from deep contraction in the previous quarter, Japan's Q4 2025 economic growth remained below market expectations, with real GDP growing just 0.1% quarter-on-quarter.  
- Private consumption, which makes up over half of GDP, showed a minimal increase of 0.1%, while capital investment rose only 0.2%, leading to concerns about the sustainability of economic recovery.  
- While the weak GDP data supports Prime Minister Fumio Kishida's expansionary fiscal policy, analysts remain cautious about the Bank of Japan's interest rate hike plans amidst ongoing economic challenges.

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Returning to growth but still weak, Japan's Q4 GDP for 2025 annualized quarterly rate is 0.2%, below expectations, supported by expansionary fiscal policy