Japan's Economy Likely Rebounded in Q4 2025 on Investment

Japan's economy is expected to have returned to growth in the final quarter of 2025, reversing a significant contraction from the previous period. A Reuters poll of economists indicates that the recovery was fueled by strong corporate investment and resilient consumer activity.

Forecast Points to 1.6% Annualized GDP Growth

The median forecast among 16 economists suggests that Japan's real gross domestic product (GDP) expanded at an annualized rate of 1.6% in the October-December period. This marks a notable turnaround from the 2.3% drop recorded in the third quarter, which was the steepest decline in two years.

Without annualization, the quarterly growth rate is estimated at 0.4%. According to Naoki Hattori, chief Japan economist at Mizuho Research & Technologies, this return to expansion "would confirm that the Japanese economy remains on a gradual recovery path."

What's Driving the Expected Recovery?

The anticipated growth is primarily supported by two key pillars of the domestic economy: business spending and private consumption.

Strong Corporate Investment Leads the Way

Capital expenditure is seen as a major driver, projected to have grown by 0.8% after contracting 0.2% in the previous quarter. This rebound is underpinned by positive business sentiment, as a Bank of Japan (BOJ) survey in December showed that confidence among large manufacturers had reached a four-year high.

Consumption Remains Resilient Despite Inflation

Private consumption, which accounts for more than half of Japan's GDP, is forecast to have edged up by 0.1%. This modest growth is considered resilient, as it occurred while consumer inflation continued to run above the Bank of Japan's 2% target, putting pressure on household budgets.

Trade and Monetary Policy Factors

External demand also played a positive role, while the economic data influenced central bank policy. Net exports are estimated to have added 0.1 percentage points to fourth-quarter GDP growth. This contrasts with the third quarter, when trade subtracted 0.2 percentage points from growth, partly due to the initial impact of U.S. tariffs on exports.

The milder-than-expected economic fallout from the tariffs appears to have given the Bank of Japan confidence. The central bank raised interest rates to 0.75% from 0.5% in December and later upgraded its forecasts for both economic growth and inflation.

Looking ahead, Prime Minister Sanae Takaichi has committed to boosting the economy with proactive fiscal policy, a pledge made in the run-up to a snap election on Sunday. These promises sent government bond yields to record highs last month.

The official preliminary GDP data for the fourth quarter of 2025 will be released by the government on February 16 at 8:50 a.m. local time (2350 GMT on February 15).