Japan's GDP grew 0.2% year-on-year in Q4, far below the 1.6% forecast, as weak capital expenditure and exports dragged down growth. U.S. tariffs and a diplomatic row with China exacerbated export declines, while the economy recovered only marginally from a 2.3% third-quarter contraction.

The supplementary budget passed in late 2025 provided limited support, prompting Prime Minister Sanae Takaichi to push for more fiscal stimulus, including tax breaks, as her coalition holds a supermajority in the lower house. Analysts suggest this could lead to accelerated stimulus measures in early 2026.

The Bank of Japan raised rates by 25 basis points in January, but analysts question its capacity to hike further despite sticky inflation, as economic growth slows. Weakness in exports and domestic demand underscores the need for urgent action to stabilize the economy.