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Japan’s economy grew at an annualised rate of 1.3% in the fourth quarter of 2025, revised government data showed on Tuesday. The preliminary estimate was 0.2%. The consensus forecast was 1.2%. Business investment rose at its fastest pace in a year. Cash earnings accelerated to 3.0% year-on-year in January, beating expectations by half a percentage point. By every conventional measure, these are the strongest economic data Japan has produced in years. The yen fell anyway.
The revised GDP figures, released by the Cabinet Office on March 10, represent one of the largest upward revisions in recent Japanese economic history. The preliminary reading of 0.2% annualised growth, published on February 16, had disappointed markets and reinforced a narrative of structural stagnation. The revision to 1.3% overturns that reading entirely. On a quarter-on-quarter basis, growth was revised from 0.1% to 0.3%, matching the median forecast, per Reuters via Nikkei Asia. The previous quarter had recorded a contraction of 2.6% annualised, meaning the swing from Q3 to Q4 approached four percentage points.
What Drove the Revision
The single largest contributor was business capital expenditure, which rose 1.3% quarter-on-quarter, the biggest increase since the final quarter of 2023. The preliminary estimate had put the figure at 0.2%, per Reuters. Economists had forecast 1.1%. The revision reflects stronger corporate spending on equipment and capacity, a signal that Japanese firms were investing more aggressively heading into 2026 than the initial data suggested.
Private consumption, which accounts for more than half of Japan’s economic output, was revised up to 0.3% from 0.1%, partly supported by fiscal measures implemented by the Takaichi government to ease cost-of-living pressures, per TradingEconomics. Government spending also rose, revised from 0.1% to 0.4%, reflecting continued fiscal support. Net trade made no contribution to growth, as both exports and imports declined by 0.3%, the former reflecting softer external demand and the latter signalling weaker domestic import needs.
Separately, average cash earnings in Japan accelerated to 3.0% year-on-year in January, per the Rio Times’ global economy briefing citing official data. The consensus had been 2.5%. The result extends the wage-growth trend that has underpinned the Bank of Japan’s gradual normalisation path since 2024. The Coincident Indicator strengthened to +2.5% month-on-month from -0.5% prior, signalling broad-based economic momentum. Japan’s labour market, with unemployment near historic lows, continues to tighten in a way that supports the case for further monetary policy normalisation.
Why the Yen Does Not Care
USD/JPY traded around 157.5 on Monday, after three consecutive weekly declines in the yen. The Nikkei 225 fell 5% on Monday as oil spiked to nearly $120 before recovering. Japanese government bond yields remained above 2.0%, constrained by the Bank of Japan’s reluctance to tighten further while the Middle East conflict persists. The GDP revision, released Tuesday morning Tokyo time, which in normal circumstances would have supported the currency through expectations of higher rates, landed into a market still processing the most volatile oil session since 2022.
Japan imports approximately 95% of its crude oil from the Middle East, with roughly 70% passing through the Strait of Hormuz, per Reuters. The strait has been functionally closed since February 28. Oil prices spiked to nearly $120 per barrel on Sunday night before retreating below $90 on Monday afternoon after President Trump signalled the war with Iran was “very complete.” But the physical disruption has not ended. Japan’s trade balance deteriorates with every dollar that crude rises, and the cost of imported energy feeds directly into the current account deficit that has historically been the yen’s fundamental support.
Bank of Japan Governor Kazuo Ueda warned last week that the Middle East conflict could materially impact Japan’s economy and signalled a likely prolonged hold on interest rates. That is the opposite of what the GDP data would normally imply. A 1.3% annualised growth rate, rising wages and improving business investment would, under pre-war conditions, have strengthened the case for a rate hike at the BoJ’s next policy meeting. Instead, the energy shock has frozen the rate path. Markets now price approximately 37 basis points of easing from the Federal Reserve for 2026, per the Rio Times, with the first cut pushed back to September. The yield differential that funds the yen carry trade remains wide.
The Structural Contradiction
Japan’s economic data describe a domestic economy that is strengthening. Businesses are investing. Wages are rising. The labour market is tight. Consumer spending, while modest, is improving. The Takaichi government’s fiscal programme, including a supplementary budget of ¥18.3 trillion and plans for a consumption tax suspension, is designed to extend that momentum. Prime Minister Takaichi won a resounding election victory, giving her coalition the parliamentary supermajority needed to push through spending plans.
None of that matters to the yen right now. The currency is being priced not on Japan’s domestic fundamentals but on the geopolitical risk embedded in its energy supply chain. Finance Minister Satsuki Katayama repeated last week that intervention “remains an option” and that authorities are monitoring the yen’s decline “with a strong sense of urgency.” But intervening to support a currency against a structural energy shock is a different proposition from intervening against speculative positioning. Japan can print yen and sell dollars. It cannot print oil.
FocusEconomics’ consensus panel projects Japanese GDP growth to remain around 1% through at least the end of 2027, with the Takaichi fiscal stimulus offering potential upside. The Shunto spring wage negotiations, now underway, could deliver average pay rises exceeding 5% for a third consecutive year, which would support real wage growth in the second half of 2026 as inflation moderates. The BoJ’s base case, per FocusEconomics, remains a 25 basis point hike in July, lifting the policy rate to 1.00%.
That hike depends entirely on whether the energy shock has passed by then. If Hormuz reopens and oil returns toward $70, the GDP data released on Monday become the foundation for a rate increase that would finally narrow the yield differential and support the yen. If the strait remains disrupted through April and beyond, the data become a footnote in a story about a country whose strongest economic performance in years was made irrelevant by a war it did not start and an energy dependency it has not resolved.
Japan grew 1.3% annualised in the fourth quarter. The yen weakened. That single sentence contains the entire contradiction of the Japanese economy in 2026.
