Japan's economy showed surprising resilience with an annualized growth of 0.2% in the fourth quarter, following a significant contraction of 2.6% in the preceding months. This growth was primarily fueled by increased private consumption, which helped offset weaknesses observed in exports and public spending, as reported by the Japanese government. Analysts had initially forecasted a much higher growth rate of 1.6%, showcasing the unexpected dynamics of the current economic climate in Japan.

Despite this marginal growth, domestic demand remains fragile, particularly amid ongoing high inflation levels. Core inflation, excluding fresh food and energy prices, averaged 3% in 2025, suggesting persistent price pressures on households. However, experts anticipate that core consumer prices may decrease to around 1% year-on-year by February, marking a potential shift after nearly four years of elevated inflation rates. Takahide Kiuchi, chief economist at Nomura Research, indicated that inflation is likely to oscillate around 2% in the short term, adding complexity to the economic recovery narrative.

The response from financial markets to these economic indicators has been mixed. Japanese stocks experienced notable gains, while the yen weakened in reaction to the government's policy directions. Overall, while Japan has narrowly avoided falling into recession, the economic outlook remains cautious, with focus now turning to inflation management and sustaining private consumption to bolster further growth in the upcoming quarters.