Japan’s Economy Slows Sharply in Q4 2025 as Investment and Exports Weaken
Japan’s economy expanded at a far slower pace than expected in the fourth quarter of 2025, as weak business investment and soft exports weighed heavily on growth. Fresh government data released on Monday showed that external trade pressures and domestic uncertainty continue to challenge the country’s recovery.
According to official figures, gross domestic product (GDP) increased by just 0.2% year-on-year in the three months ending December 31. This result fell well short of market expectations for 1.6% growth. Although the economy returned to expansion after a sharp 2.3% contraction in the third quarter — its steepest decline in two years — the rebound was minimal.
On a quarterly basis, Japan’s GDP rose only 0.1%, missing forecasts of 0.4%. The weaker-than-expected reading was largely driven by sluggish capital expenditure. Business investment grew just 0.2% in the fourth quarter, compared with expectations of 0.8%, signaling caution among companies amid global uncertainty.
Exports, which are a major pillar of the Japanese economy, showed no growth during the quarter. Ongoing U.S. trade tariffs continued to pressure key export industries. At the same time, a diplomatic dispute with China further complicated the outlook. Tensions escalated after comments by Prime Minister Sanae Takaichi regarding potential military intervention in Taiwan, prompting Chinese consumers to boycott Japanese goods. Chinese tourism to Japan also declined noticeably, adding to external demand weakness.
Private consumption, another critical growth driver, increased by just 0.1% in the quarter, reflecting subdued domestic demand. Meanwhile, the GDP price index — a key measure of inflation — rose 3.4%, slightly above expectations of 3.2%, indicating persistent price pressures.
Despite the passage of a substantial supplementary budget in late 2025, the latest GDP data suggests that fiscal support has yet to significantly boost economic activity. The slowdown is likely to strengthen calls for additional stimulus measures. Prime Minister Takaichi has repeatedly advocated for tax relief and fiscal transfers to support households and businesses.
Analysts at Capital Economics noted that annual GDP growth slowing to only 0.1% year-on-year reinforces the case for looser fiscal policy. They suggested that the government may accelerate plans to suspend the sales tax on food and introduce another supplementary budget in the first half of the new fiscal year, rather than waiting until year-end.
Political developments may also facilitate further stimulus. After securing a supermajority in Japan’s lower house during last week’s elections, the ruling coalition now has a clearer legislative path to implement additional economic measures.
The weak GDP figures also raise questions about the Bank of Japan’s policy trajectory. Although inflation remains relatively elevated, slower growth could limit the central bank’s ability to tighten monetary policy further. The Bank of Japan raised interest rates by 25 basis points in January and indicated that any additional hikes would depend on the outlook for growth and inflation.
As Japan navigates trade tensions, diplomatic strains, and soft domestic demand, policymakers face increasing pressure to balance fiscal expansion with monetary stability in order to support the country’s fragile recovery.
