Japan’s economy narrowly avoided a technical recession in the fourth quarter of 2025, posting a modest 0.1% expansion, according to government statistics released on . While the growth marks a reversal from the 0.7% contraction experienced in the third quarter, it fell short of economists’ expectations of a 0.4% increase, intensifying pressure on Prime Minister Sanae Takaichi’s administration.
The slight uptick in gross domestic product (GDP) was driven by stimulus measures implemented by Prime Minister Takaichi, but the impact was less pronounced than anticipated. For the entirety of 2025, Japan’s GDP grew by 1.1%, a recovery from the 0.2% decline recorded in 2024.
Takaichi, the first woman to lead Japan, announced a ¥117 billion (approximately $760 million USD based on current exchange rates) stimulus package in November, including energy subsidies and direct payments to households, aimed at alleviating the burden of persistent inflation and boosting economic activity.
Consumer prices in Japan rose 2.4% year-on-year in December (excluding fresh food), a slowdown attributed to government subsidies, but remain above the Bank of Japan’s 2% target. Consumer spending, however, continues to be a drag on the economy, with average household expenditure falling 0.3% year-on-year in December, according to official figures released earlier this month.
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Economists at UBS observed that “challenges await the Takaichi administration, which seeks to halt Japan’s prolonged decline by encouraging domestic investment in strategic sectors through proactive fiscal policy.” They also cautioned about “persistent concerns regarding the effectiveness of fiscal policy and the risks of increased debt and inflation.”
Prior to the parliamentary elections, where her coalition secured a supermajority, Takaichi pledged to further bolster measures by exempting food products from the 8% consumption tax for two years. The government is also planning another record budget for the coming fiscal year.
After nearly stagnating in 2024, the Japanese economy faced headwinds in 2025 from the tariffs imposed by the administration of U.S. President Donald Trump. Exports are a crucial engine of growth for the island nation.
A trade agreement reached during the summer between the two powers set U.S. Tariffs on Japanese goods at 15%, below the threatened 25%, but significantly higher than previous levels. Japanese exports to the United States declined 11.1% year-on-year in December.
Adding to the economic challenges, geopolitical tensions between Tokyo and Beijing have increased, with China announcing stricter trade restrictions and a decline in Chinese tourist arrivals to Japan.
The Bank of Japan recently raised its economic growth forecast for the fiscal year ending in to 0.9% from 0.7%, and its outlook for fiscal 2026 to 1% from 0.7%, anticipating moderate expansion as other countries recover. The central bank also expects a virtuous cycle of rising prices and wages, supported by government measures and accommodative financial conditions.
Despite the modest GDP growth, the yen weakened 0.25% to 153.06 against the dollar following the data release, while the Nikkei 225 opened up 0.12%. This suggests that investors remain cautious about the sustainability of the recovery and the impact of external factors.
The situation highlights the delicate balancing act facing the Takaichi administration. While the stimulus measures provided a short-term boost, the underlying structural issues – including an aging population, declining productivity, and external economic pressures – remain significant challenges. The effectiveness of the government’s policies in addressing these issues will be crucial in determining Japan’s economic trajectory in the coming years.
The interplay between domestic policy and global trade dynamics will be particularly important. The ongoing trade relationship with the United States, and the evolving geopolitical landscape in East Asia, will continue to exert significant influence on Japan’s economic performance. The government’s ability to navigate these complexities will be a key factor in securing a more robust and sustainable recovery.
