The Japanese economy is back on the growth track, clearing the way for a rate hike.

Despite being impacted by US tariffs, the Japanese economy recovered growth in the fourth quarter of 2025, providing room for the Bank of Japan to continue raising interest rates. This recovery is good news for policymakers who have been working for years to boost the Japanese economy out of long-term stagnation and achieve recovery. Preliminary data released by the Japanese government on Monday shows that for the quarter of October to December 2025, real GDP grew by 0.1% compared to the previous quarter. The Japanese economy had contracted by 0.7% in the previous quarter, while economists surveyed by data agency Quick had expected a median growth of 0.4%. Calculated on an annualized basis, the economy grew by 0.2% for the quarter. The results show that Japan's performance in resisting the impact of US tariffs exceeded expectations. Exports decreased by 0.3% compared to the previous quarter's 1.4% decline. On the domestic front, capital spending increased slightly by 0.2% compared to the previous quarter, while personal consumption grew by 0.1%. This positive data is likely to strengthen the Bank of Japan's confidence in the domestic economic recovery, even though the global environment remains unstable, and it has opened the door for the bank to further tighten monetary policy. However, after Prime Minister Sanae Takamichi led her party to a landslide victory earlier this month, the Bank of Japan may need to delicately balance between monetary and fiscal policies. Although the data supports the Prime Minister's growth-oriented stimulus policies, Takamichi's strong mandate to implement expansionary policies may make the bank's job of managing inflation more complicated.