Quick Commentary on Japan's 2025 Q4 GDP

 Quick Commentary on Japan’s 2025 Q4 GDP

 

Japan’s GDP for 2025 Q4 showed only marginal growth,
with real GDP up 0.1% QoQ and nominal GDP up 0.6%,
clearly undershooting market expectations.
 

In Q3, the economy had already contracted
(real ▲0.7%, nominal ▲0.0%),
so the latest figures confirm that Japan remains stuck in a phase of stagnation,
despite the sharp rally in Japanese equities following Prime Minister Takaichi’s snap election.
The disconnect between the real economy and financial markets is becoming ever more pronounced.

 

For calendar year 2025, GDP grew
+1.1% in real terms and +4.5% in nominal terms,
an apparent improvement from 2024
(real ▲0.2%, nominal +3.0%).
 

However, the quality of this improvement is highly questionable.
The key point is the GDP deflator,
which rose +3.4% in 2025,
up from +3.2% in 2024.
This means that inflation, measured on a value-added basis, has actually accelerated.
 

Contrary to Governor Ueda’s repeated claim that
“underlying inflation has not yet reached 2%,”
there is no support for this view in the GDP data.
 

Since 2022, the GDP deflator has consistently indicated
inflation clearly above 2%,
signalling that price pressures in Japan are now structural rather than transitory.
In short:
•     Growth is weak, inflation is entrenched, and equities are booming.
•     Japan appears to be drifting into a regime of “low growth, persistent inflation, and asset price inflation”,
a configuration that raises serious questions for monetary and fiscal policy going forward.