Japan’s annualised gross domestic product grew by 0.2% in the fourth quarter. This was below the 1.6% forecast.
The 0.2% reading shows slower growth than expected for the period. The report compares actual output growth with the market estimate.
Japan Growth Miss Raises Stagnation Risks
The final quarter GDP figure for 2025 coming in at 0.2% is a significant shock, falling far short of the 1.6% we were anticipating. This indicates Japan’s economy is teetering on the edge of stagnation, especially after we saw a slight contraction in the third quarter of last year. The data strongly suggests that domestic demand is collapsing faster than expected.
This weak growth forces the Bank of Japan into a corner, making it highly improbable they will raise interest rates anytime soon. Therefore, we should anticipate a weaker Japanese Yen as the interest rate gap with other major economies widens. We are increasing our positions in USD/JPY call options, targeting a move towards the 158 level in the coming weeks.
For equity traders, the situation is complex. While a stalling economy is negative, the resulting yen weakness is a major boost for Japan’s large, export-oriented companies that dominate the Nikkei 225. We believe this currency effect will outweigh the domestic gloom, so we are using put options on the yen rather than directly shorting the Nikkei index.
Any expectations of the Bank of Japan ending its accommodative policy at its March meeting should now be dismissed. Recent data from January already showed core inflation dipping back to 1.8%, falling below the central bank’s 2% target for the first time in over a year. This GDP report effectively guarantees that monetary policy will remain ultra-loose for the foreseeable future.
This pattern is reminiscent of what we observed through much of 2024, when poor economic data consistently pushed back expectations for policy normalization and fueled the yen carry trade. In fact, positioning data from early February 2026 already showed speculative short positions against the yen nearing their highest levels since last October. We see this trend accelerating sharply in the near term.
