Slight Growth of Japan's Economy in Q4 Strengthens Justifications for Government Spending

SadaNews - The Japanese economy recorded limited growth in the fourth quarter of 2025, recovering from a sharp contraction in the previous period, which enhances the justifications for the proactive spending policies adopted by Prime Minister Sanae Taketachi following her historic electoral victory.

Japan’s real GDP grew by 0.2% year-on-year in the three months ending in December, according to a report released by the Cabinet Office on Monday. This was weaker than the median estimate by economists who had anticipated a growth of 1.6%.

Private residential investment rose by 4.8% in real terms compared to the previous quarter, a result expected after a collapse in the prior quarter due to regulatory changes.

Consumer spending, the largest component of GDP, also grew by 0.1%, reflecting the fragility of domestic demand as households continue to face inflation that has remained above the Bank of Japan's target of 2% for four years until 2025. Capital spending increased by 0.2%.

Intermittent Recovery Despite Rate Hike Expectations

Monday's numbers underscore the uneven nature of the economic recovery, which lacks a strong driver beyond transitory factors. However, limited economic activity indicators are unlikely to deter the Bank of Japan from raising the key interest rate later this year.

Taro Kimura, an economist at Bloomberg Economics, stated, "For the Bank of Japan, the data supports its view that uncertainty about growth is diminishing as U.S. trade policy becomes clearer, allowing it to gradually reduce stimulus. We expect a 25 basis points hike in July."

Additional Boost for Government Spending Plans

On the fiscal front, the report may add momentum to Taketachi's efforts to support growth through government spending and targeted investments. Earlier this month, the Prime Minister led her "Liberal Democratic Party" to the largest single-party victory in a general election since the war, granting her a mandate to push her expansionary policies.

The size of her electoral victory has alleviated pre-election concerns about potential delays in passing the regular budget for the fiscal year starting in April. With the "Liberal Democratic Party" securing two-thirds of the powerful House of Representatives seats, the smooth passage of the budget is now nearly guaranteed.

Taketachi plans to expedite discussions on whether to temporarily suspend the sales tax on food, stating that she would cover the lost revenue without relying on government bonds designated to cover the deficit.