Japan’s economy escaped recession

Although reversing the decline of 0.7% in the third quarter of 2025, the growth rate of the Japanese economy is still lower than experts’ forecasts. An economy is considered to be in technical recession when it has two consecutive quarters of decline.

Japan’s adjusted GDP on an annual basis increased by 0.2%, significantly lower than expectations of 1.6%. Previously, in the third quarter of 2025, this index decreased by 2.3%. According to data from Japan’s Cabinet Office, private consumption is the main driver behind this modest growth, helping to offset declines in exports and public spending.

In January, the Bank of Japan (BOJ) raised its economic growth forecast for the fiscal year ending March 2026 to 0.9%, instead of 0.7% as before.

The BOJ expects the economy to expand moderately as other countries gradually recover. The agency also sees a “positive virtuous cycle” between prices and wages, supported by the Government’s economic measures and easing financial conditions.

Economic data was released in the context that Japan is negotiating with the US – its second largest trading partner – on an investment commitment worth 550 billion USD within the framework of a bilateral trade agreement. NHK reported on Friday that the two sides have not yet reached a consensus on the first projects of this investment package.

Japanese Economy Minister Ryosei Akazawa hopes that the list of cooperative projects will soon be completed before the meeting between Prime Minister Sanae Takaichi and US President Donald Trump. Previously, Mr. Trump announced a meeting with Ms. Takaichi right before the House of Representatives election on February 8 – where Ms. Takaichi led the ruling Liberal Democratic Party (LDP) to an overwhelming victory.

After the victory, Prime Minister Takaichi affirmed that he would support growth by promoting investment through “proactive” fiscal policy, although he did not provide a detailed roadmap. Previously, she pledged to suspend food taxes for two years and raise the defense budget to 2% of GDP.

Bruce Kirk, Managing Director and Chief Strategist for Japanese stocks at Goldman Sachs, said that defense will be the next big driving force to help the country’s stock market break out. This expert expects that the upcoming meeting between Ms. Takaichi and Mr. Trump will create “a series of cooperation announcements” between businesses of the two countries in areas such as industrialization, factory automation and shipbuilding.

Before the election, Ms. Takaichi announced a record budget of 122,000 billion yen for the fiscal year starting next April. This is the second consecutive year that Japan has spent record amounts to support households facing living cost pressures.

Regarding inflation, this index in Japan fell sharply to 2.1% in January, the lowest level since March 2022. However, prices here have remained above the BOJ’s 2% target for 45 consecutive months.