Japan’s economy returned to marginal growth in the fourth quarter of 2025, but the expansion fell well short of expectations, underscoring the fragile nature of the recovery.

Preliminary data showed real GDP rose 0.1% quarter-on-quarter in the October–December period, following a revised 0.7% contraction in Q3. On an annualised basis, growth came in at just 0.2%, significantly below market expectations for a 1.6% gain and weaker than forecasts of a 0.4% quarterly rise.

Private consumption, which accounts for more than half of Japan’s economic output, increased 0.1% in Q4, matching expectations but slowing from the 0.4% pace recorded previously. Persistently elevated food prices continue to weigh on household spending, limiting momentum in domestic demand.

Business investment showed only modest improvement. Capital expenditure rose 0.2% quarter-on-quarter, undershooting expectations for a 0.8% gain and marking only a partial rebound from prior weakness.

External demand provided no net boost to growth. Exports declined 0.3% in the quarter, though the fall was milder than in Q3, suggesting the initial shock from US tariff measures may be easing. Net external demand contributed zero percentage points to overall GDP, compared with a drag in the previous quarter. Domestic demand also made a neutral contribution.

Inflationary dynamics remain firm, with the GDP deflator rising 3.4% year-on-year, highlighting persistent price pressures even as real growth remains subdued.

The data suggest Japan has stabilised after a sharp contraction but is far from a strong recovery. For the Bank of Japan, the modest return to growth provides some reassurance as it continues policy normalisation, though the softness in private demand and investment signals that tightening will likely proceed cautiously. Meanwhile, expansionary fiscal plans under Prime Minister Sanae Takaichi add complexity to the policy mix.