Japan's Q4 2025 GDP Growth Falls Sharply Below Expectations Amid Weak Business Spending and Exports

Economic Growth Disappoints in Late 2025

Japan's economy recorded a significantly slower growth rate than anticipated in the fourth quarter of 2025, with government data released on Monday, February 16, 2026, indicating an annualized expansion of just 0.2%. This figure fell considerably short of market expectations, which had projected a 1.6% growth. On a quarter-on-quarter basis, the Gross Domestic Product (GDP) edged up by only 0.1%, missing forecasts of a 0.4% increase. This modest rebound follows a 2.3% annualized contraction in the third quarter of 2025, meaning Japan narrowly avoided a technical recession, defined as two consecutive quarters of contraction.

Key Drivers Underperform

The primary factors contributing to the weaker-than-expected performance were a notable slowdown in business spending and a contraction in exports. Capital expenditure, a key component of business spending, rose by only 0.2% in the fourth quarter, well below the anticipated 0.8%.

Exports, representing external demand, showed no growth and even dipped by 0.3% during the period. This decline was attributed to several headwinds, including weak automobile shipments affected by U.S. tariffs and a significant drop in visitors from China. The reduction in Chinese tourism and boycotts of Japanese products were linked to a diplomatic row stemming from comments made by Prime Minister Sanae Takaichi regarding military intervention in Taiwan.

Furthermore, private consumption, which constitutes more than half of Japan's GDP, grew at a muted 0.1%. This was the slowest growth in a year, largely due to persistent cost pressures, particularly rising food prices, which continued to weigh on household spending.

Broader Economic Context and Implications

The latest GDP figures highlight ongoing challenges for the Japanese economy. Despite a major supplementary budget passed in late 2025, it appeared to offer little immediate support. Inflationary pressures also remained evident, with the GDP price index, an indicator of inflation, growing by 3.4% in the quarter, exceeding expectations of 3.2%. Real wages, adjusted for inflation, remained negative for the 12th consecutive month in December and for the fourth consecutive year on an annual basis, further impacting consumer purchasing power.

This weaker economic performance is likely to provide further impetus for Prime Minister Takaichi's administration to pursue expansionary fiscal policies, including potential tax breaks and fiscal payouts. The data also raises questions about the Bank of Japan's (BoJ) future monetary policy decisions, particularly regarding the scope for further interest rate hikes, despite a 25 basis point increase in January and increasing signs of sticky inflation. For the full year 2025, Japan's real GDP growth stood at 1.1%.