Japanese economic growth fell quite short of market expectations in the last quarter of 2025, official data showed Monday, adding to pressure on Prime Minister Sanae Takaichi to stimulate activity after her recent landslide election win.

Fresh off a sweeping election victory, Takaichi's administration ⁠is preparing to ramp up investment through targeted public spending to ⁠shore up consumption and revitalize economic growth.

Monday's data also brings sharp focus to the challenge at hand for policymakers at a time when the Bank of Japan (BOJ) has reiterated its pledge to keep raising interest rates and normalize monetary settings from years of ultralow 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.

Gross domestic product (GDP) in the world's fourth-largest economy increased an annualized 0.2% in the October-December quarter, government data showed, well short of a median estimate of a 1.6% gain in a Reuters poll. It barely scraped back to growth from a larger revised 2.6% contraction in the previous quarter.

The reading translates into a quarterly rise of 0.1%, also weaker than the median estimate of a 0.4% uptick.

For the whole of 2025, Japan's economy grew 1.1%, after a 0.2% contraction in 2024, the data showed.

"It shows that the economy's recovery momentum is not very strong," Meiji Yasuda Research Institute economist Kazutaka Maeda said. "Consumption, capital expenditure and exports – areas we hoped would drive the economy – just haven't been as strong as we expected."

The surprisingly soft momentum will keep investors on alert for Takaichi's campaign pledge to suspend a consumption tax, an issue that sparked turmoil in Japanese markets worried about fiscal slippage in a nation with the heaviest debt burden in the developed world.

Takaichi became Japan's first woman prime minister in October and called snap elections for Feb. 8. The vote saw her Liberal Democratic Party (LDP) win a historic two-thirds majority in the lower house.

"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, rather than wait until the end of this year," Capital Economics' Thieliant said.

In November, Takaichi's government pushed through a 21.3-trillion-yen ($139-billion) stimulus package aimed at boosting growth. It included energy subsidies, cash handouts, and investment incentives in key fields like semiconductors and artificial intelligence.

It also included funds for expanded spending on defense, as China increases military activities in the wider region. Her spending plans, however, have worried investors, and the latest GDP data suggests they did begin to fully materialize as consumption remained dim, according to analysts.

Japanese stocks stuttered in the wake of the GDP data, while bonds were subdued.

Slower rate hikes?

Analysts, meanwhile, also project Japan will continue to expand at a gradual pace this year, though the fourth quarter's weak outcome suggests the economy might 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," Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, said.

A survey this month by the Japan Center for Economic Research showed 38 economists forecast an average annualized GDP growth of 1.04% in the first quarter and 1.12% in the second quarter.

Economists say the latest GDP report is unlikely to affect the Bank of Japan's policy decisions, but Takaichi's historic election win has heightened market attention to whether the dovish premier will renew her calls ⁠for interest rates to be kept low.

"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. The country's inflation dynamic underscored the policy tensions between the government ​and the central bank.

Mitsubishi UFJ's Kobayashi, for instance, expects the central bank to prioritize bringing inflation to heel.

"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 economic output, rose 0.1% in October-December, matching market estimates.

It cooled from the 0.4% rise in the previous quarter, indicating that persistently high food costs remain a ⁠drag on household spending.

Trump factor

Capital ‌spending, a key ‌driver of private demand-led growth, also rose at a slow pace of 0.2% in the fourth quarter, ⁠versus a rise of 0.8% in the Reuters poll.

To be sure, historically, capex has been a ‌volatile data set and future revisions could point to the economy carrying more momentum into 2026 than initial estimates suggest.

That still leaves the economy with a lot of catching up to do, especially ​as its key manufacturing industry struggles to adapt to ⁠a protectionist U.S. administration under President Donald Trump.

Indeed, net external demand, or exports minus imports, contributed nothing to fourth quarter growth, ⁠versus a 0.3-point drag in the July-September period.

Exports did post a milder drop after the U.S. formalized a baseline 15% tariff on nearly all Japanese ⁠imports, down from 27.5% on autos and ​initially threatened 25% on most 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," Meiji Yasuda's Maeda said.