Japan's fourth quarter GDP growth rate exceeded expectations and was revised up to 1.3%, but the war in Iran has cast a shadow over the economic outlook.

Revised data released on Tuesday showed that, thanks to the rapid growth in corporate investment, the Japanese economy grew faster than expected in the final quarter of 2025, despite the shadow cast by the conflict in the Middle East. Japan's real gross domestic product (GDP) in the fourth quarter increased by 1.3%, higher than the previous 0.2%, and slightly above the median forecast of 1.2% by economists. On a quarterly basis (not annualized), GDP grew by 0.3%, matching the expected median of 0.3% and higher than the previous growth of 0.1%. Capital expenditure by businesses in the fourth quarter increased by 1.3%, marking the largest increase since October to December 2023. This figure was revised up from the initial estimate of 0.2% and surpassed economists' previous forecast of 1.1%. Private consumption, which accounts for over half of Japan's economy, grew by 0.3%, also revised up from the initial data of 0.1%. Takeshi Minami, chief economist at Norinchukin Research Institute, said: "The upward revisions of the two data further indicate that Japan's economic growth led by domestic demand is still ongoing." Domestic demand contributed 0.3 percentage points to the fourth quarter GDP, up from the initial estimate of 0%. External demand (exports minus imports) remained at 0%, in line with the initial data. Other data released on Tuesday showed that household spending in Japan unexpectedly dropped by 1.0% year-on-year in January, which is a worrying sign for private consumption. Minami said: "Japan's economy is expected to continue growing in the January to March period, but after April, if the Iran conflict leads to sustained disruption in energy imports and price hikes may dent consumption, and businesses may also cut back on capital investment." Japanese Prime Minister Sanae Takaichi stated on Monday that Japan will consider measures to curb gasoline prices to mitigate the impact of rising fuel costs due to the Iran conflict on the economy. The Bank of Japan has not changed its stance on raising interest rates when economic growth meets expectations, although Governor Haruhiko Kuroda has stated that the Middle East conflict could pose a risk to global economic growth and vigilance is required. Japan's economic growth in the fourth quarter followed a contraction of 2.6% in the third quarter and growth of 2.4% in the second quarter. After revisions, the nominal GDP size of the country last year was 663.8 trillion yen ($4.20 trillion), while India, seen as about to surpass Japan as the world's fourth-largest economy, has not yet crossed the $4 trillion GDP mark. Meanwhile, boosted by slowing inflation, real wages for Japanese workers saw positive growth for the first time in 13 months. This positive change is expected to boost consumer confidence and provide support for key policy goals of the Bank of Japan and the government. Data released on Monday by the Ministry of Health, Labour and Welfare showed that real wages in January, adjusted for inflation, increased by 1.4% year-on-year, significantly exceeding economists' expected growth of 0.9%. This is the fastest growth rate for this indicator since May 2021, ending the downward trend seen throughout 2025.