In a surprising turnaround, Japan's economy has returned to growth, setting the stage for the Bank of Japan (BOJ) to continue its campaign of interest rate hikes. The country's GDP expanded by 0.1% in the fourth quarter of 2025, narrowly avoiding a technical recession after contracting in the previous period.
What this really means is that the BOJ now has more breathing room to gradually normalize monetary policy and tackle stubbornly high inflation, which has remained above its 2% target. As Reuters reports, a top Mizuho executive believes the central bank could raise rates as early as March and deliver up to three hikes this year.
Resilient Consumption Drives Rebound
The rebound was largely driven by a surprise increase in private consumption, which grew 0.1% in Q4 after a 0.7% rise in the prior quarter. Business investment also perked up, expanding 0.5% and reversing the previous quarter's decline.
The bigger picture here is that while the headline GDP number beat expectations, the underlying data paints a more mixed picture. As Reuters notes, the robust consumption was partly flattered by high year-end bonuses, which may not be sustained.
Policy Shifts Open Door for More Hikes
Nonetheless, the BOJ seems emboldened by the latest data, as well as other positive economic signals. The central bank raised its economic growth forecast for the current fiscal year to 0.9% and expects a "virtuous cycle" of rising prices and wages.
This more upbeat outlook, combined with the election victory of Prime Minister Sanae Takaichi, who has vowed to support growth through "proactive" fiscal policy, appears to give the BOJ greater confidence to continue normalizing policy. As recent analysis suggests, this could mean more rate hikes are on the horizon for Japan.