Japan’s economy stumbled back into weak growth in the fourth quarter, raising fresh concerns for Prime Minister Sanae Takaichi’s government as inflation and high living costs continue to weigh on consumer confidence and domestic demand.
Government data released Monday showed gross domestic product (GDP) increased an annualised 0.2% in October-December, falling far short of a median market forecast of 1.6% in a Reuters poll. The reading marked a slight rebound from a revised 2.6% contraction in the previous quarter but highlighted that recovery momentum remains fragile. On a quarterly basis, GDP rose just 0.1%, weaker than the expected 0.4% uptick.
“It shows that the economy’s recovery momentum is not very strong,” said Kazutaka Maeda, economist at Meiji Yasuda Research Institute. “Consumption, capital expenditure and exports—areas we hoped would drive the economy—just haven’t been as strong as we expected.”
Fresh off a sweeping election win, Takaichi’s administration is preparing targeted public spending to stimulate consumption and bolster growth. Analysts say the soft GDP numbers underscore the challenge for policymakers, particularly as the Bank of Japan (BOJ) continues to raise interest rates after years of ultra-low borrowing costs amid persistent inflation and a weak yen.
“PM Takaichi’s efforts to reflate the economy via looser fiscal policy look prescient,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.
The data is likely to intensify attention on Takaichi’s campaign pledge to suspend the consumption tax, a policy issue that previously unsettled Japanese markets amid concerns over fiscal strain in a nation carrying the world’s heaviest developed-economy debt burden.
“In fact, sluggish economic activity increases the chances that Takaichi will not only press ahead with suspending the sales tax on food but enact a supplementary budget during the first half of the fiscal year that starts in April already rather than wait until the end of this year,” Thieliant added.
Japanese stocks stumbled in response to the GDP release, while bond markets remained subdued. Analysts predict Japan will continue to expand at a gradual pace in 2026, but the weak fourth-quarter performance suggests the economy may struggle to fire on all cylinders.
“Whether the economy can achieve sustainable growth really depends on whether real wages can firmly return to positive growth,” said Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting.
A survey by the Japan Center for Economic Research this month indicated that 38 economists expect average annualised GDP growth of 1.04% in the first quarter and 1.12% in the second.
Despite the soft numbers, the latest GDP report is unlikely to shift the BOJ’s policy stance, though Takaichi’s historic win has drawn market scrutiny over whether the dovish premier will continue advocating low interest rates.
“Although GDP posted positive growth this time, the momentum was weak, and with the need to assess the impact of the December rate hike, the likelihood of an additional hike in the near term appears to have receded,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Japan’s inflation picture continues to complicate policy choices. Kobayashi said the central bank’s priority will remain controlling price pressures.
“Rather than this rate hike causing the economy to stall, the BOJ’s focus is likely to be on how to contain inflation,” he said.
Private consumption, which accounts for more than half of Japan’s economic output, rose 0.1% in the quarter, matching market expectations but down from a 0.4% increase in the previous period. Persistently high food prices continue to drag on household spending.
Capital spending, another key driver of demand-led growth, rose only 0.2% in the quarter, underperforming a Reuters poll forecast of 0.8%. Economists note capex figures are volatile and revisions could show stronger underlying momentum in 2026.
Meanwhile, Japan’s manufacturing sector faces headwinds from a protectionist U.S. trade stance under President Donald Trump. Net external demand contributed nothing to growth in the fourth quarter, compared with a 0.3-point drag in July-September. Exports fell moderately after the U.S. formalised a baseline 15% tariff on most Japanese imports, down from an initially threatened 25% to 27.5% on automobiles and other goods.
“The impact of tariffs appears to have peaked in July-September, but judging from the latest results, there is at least some possibility that firms will continue to take a somewhat cautious stance going forward,” Maeda said.
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