Japan’s gross domestic product rose 0.1% quarter-on-quarter in the fourth quarter.
This was 0.3 percentage points below the 0.4% forecast.
The weaker fourth-quarter GDP result for 2025 points to a slowing domestic economy in Japan. It also makes a near-term Bank of Japan (BoJ) interest rate hike less likely. In our view, this supports a more dovish BoJ policy stance in the coming months.
This backdrop makes shorting the Japanese Yen an attractive trade. We should consider buying call options on USD/JPY to benefit from expected Yen weakness. The low 0.1% growth rate suggests the interest-rate gap between the U.S. and Japan is likely to stay wide.
Recent data from late January 2026 supports this view. Core inflation fell to 1.8%, dropping below the BoJ’s 2% target for the first time in more than a year. This gives the central bank even less reason to tighten policy and support the currency. We think the Yen is more likely to weaken than strengthen.
A weaker Yen is also usually positive for Japanese stocks, especially the export-heavy Nikkei 225. We should consider going long Nikkei 225 futures. A favorable exchange rate can lift overseas earnings for exporters like Toyota and Sony, often offsetting concerns about a soft domestic economy.
We have seen this pattern before, including during the 2024 rallies when a falling Yen helped push the Nikkei to record highs. The latest January 2026 trade data, which showed exports up 7% year over year, suggests this dynamic is still in place. The weaker currency is feeding through into stronger overseas sales.
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