Japan's Economy Sees Modest Rebound, Falls Short of Expectations

Japan's economy demonstrated a modest recovery in the fourth quarter of 2025, with a reported growth of 0.1% compared to the preceding three months. This uptick follows a more significant 0.6% contraction observed in the third quarter. However, the gross domestic product figure for Q4 did not meet the 0.4% expansion predicted by economists polled by Reuters.

On an annualized basis, the economy expanded by 0.2%, which also fell below the anticipated 1.6% and marked a rebound from the prior quarter's 2.3% decline. Despite these figures, the Bank of Japan, in January, revised its economic growth forecast for the fiscal year ending March 2026 upwards to 0.9% from 0.7%. The central bank anticipates moderate expansion, buoyed by a global economic resurgence and a projected virtuous cycle of rising prices and wages.

This economic data emerges as Japan collaborates with the United States on a substantial $550 billion investment pledge, a key component of their trade agreement. Discussions are ongoing regarding the initial projects tied to this pledge, with hopes for finalization before Prime Minister Sanae Takaichi's meeting with U.S. President Donald Trump. Prime Minister Takaichi, following a decisive election victory, has pledged to stimulate economic growth through proactive fiscal policy and increased investment.

She has also proposed suspending food taxes for two years and increasing defense spending to 2% of the national budget. Earlier, a record budget of 122 trillion yen for the fiscal year starting April 1 was announced, aiming to support households facing cost-of-living pressures. Japan's inflation, while slowing to 2.1% in January, has remained above the Bank of Japan's 2% target for 45 consecutive months.