Japan’s annualised gross domestic product grew by 0.2% in the fourth quarter. This was below the 1.6% forecast.
The 0.2% result shows the economy grew more slowly than expected. The report compares actual output growth with the market estimate.
Japan Growth Miss Raises Stagnation Risks
Japan’s final-quarter 2025 GDP came in at 0.2%, a major surprise and well below the 1.6% we expected. This suggests the economy is close to stagnation, especially after the small contraction in the third quarter last year. The data points to domestic demand weakening faster than anticipated.
This weak number puts the Bank of Japan under pressure and makes a near-term rate hike very unlikely. As the rate gap with other major economies widens, the yen could weaken further. We are adding to USD/JPY call option positions and targeting a move toward the 158 level in the coming weeks.
For equity traders, the picture is mixed. Slower growth is negative, but a weaker yen helps Japan’s large exporters, which make up much of the Nikkei 225. We think the currency boost will outweigh the weak domestic backdrop. So, we prefer using put options on the yen rather than directly shorting the Nikkei.
Expectations that the Bank of Japan will end its accommodative policy at the March meeting should now be dropped. January data already showed core inflation falling to 1.8%, below the bank’s 2% target for the first time in more than a year. This GDP report makes it even more likely that policy will stay ultra-loose for some time.
This looks similar to much of 2024, when weak data repeatedly delayed policy normalisation and supported the yen carry trade. Positioning data from early February 2026 also showed speculative short yen positions close to their highest levels since last October. We expect this trend to pick up quickly in the near term.
Yen Weakness And Carry Trade Momentum
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