Growth in Japan in the last quarter of 2025 “provided broad disappointments” according to analysis from Amova Asset Management’s chief global strategist Naomi Fink, who added that the full-year 2025 picture was more sanguine.
GDP growth of 0.6% in nominal terms, and capex growth at 0.6% and a net nil change in quarter-on-quarter growth in net exports were among the disappointments noted.
However, Fink added that: “From a full-year perspective, Japan has delivered resilience in a year of significant uncertainty; its full-year 2025 real GDP growth estimates are well above potential, at 1.1% (BOJ estimates potential to be near 0.4%), with private demand recovering to expand 1.6% over the year, following negative readings in both 2024 and 2023.”
“A big part of this was domestic consumption and private non-residential investment, all growing well above 1% over the full year. The problem remains that even these healthy above-potential results pale in comparison to nominal growth of over 4% y/y in the above-mentioned sub-components, underscoring that despite the household’s potential to engage in greater consumption, much of this potential is being eaten up by price rises.”
“Meanwhile, a weak yen is weighing on terms of trade, which reduces Japan’s real purchasing power. Despite ongoing growth in the volume and value of exports over the full year (+0.6% y/y in real terms, +0.7% in nominal terms), the rising value of imports has constrained Japan’s global purchasing power. We may also see many of these dynamics play out in y/y data.”
Fink identifies real wage inflation as a key forward indicator. Rising wages will spur household demand. But rising wages are also putting pressure on company costs, and decisions on using human capital – and thereby also linked to trends in labour-saving devices and immigration.
Fink adds: “Whether inflation is demand-pull (wage-driven) or cost-push (influenced by price rises, foreign exchange and terms of trade) remains a complex question, and it is not as simple as contrasting household real vs. nominal consumption to resolve this question. The firm GDP deflator clearly shows that prices are driving a wedge between the volume and value of consumption. The weak yen is a contributing factor to the terms of trade drag. Insofar as interest rates in Japan remain far below those of its developed economy counterparts despite experiencing similar rates of inflation, the relatively cheaper yen has facilitated the financing of risk investments across the globe. These flows may have contributed to the yen’s chronic weakness, which all else equal may increase pressure on the Bank of Japan to prioritise normalisation of interest rates in the interest of calming imported inflation.”
Japan in focus
The macro insights follow on from the broader overview of developments in Japan provided in the past week at the more recent Japan Securities Summit event that took place in London on 11 February.
Co-hosted by the International Capital Market Association (ICMA), Japan Securities Dealers Association (JSDA) and Japan Exchange Group, Inc. (JPX) at Mansion House, the event featured a panel titled: Japan’s Economic Outlook and Investment Opportunities: Why Japan?
Panellists Lynda Gratton, professor of Management Practice, London Business School, Mitsumaru Kumagai, deputy president, deputy chairman, Daiwa Institute of Research Ltd, and Simon Webber, portfolio manager, head of Global Equities, Schroders, along with moderator Laurent Depus, secretary general, International Bankers Association of Japan, considered broader macro elements driving growth in the country.
From the investor perspective, Kumagai noted the roughly £11trn equivalent in household assets, of which a significant portion is in cash/deposits. The government is seeking to encourage investments from households, for example, through the NISA wrapper – similar to the ISA wrapper in the UK. The Japanese government is also attempting to attempt more foreign asset managers to enter the local market.
The Takaichi administration is focused on using rising real wages plus investments to drive growth, the panel heard.
Meanwhile, corporate earnings growth means that even at current levels, the stock market still points to Japanese equity being relatively cheap. Webber pointed to ongoing share buybacks as part of the positive developments alongside improvements in corporate governance, which have made Japan more attractive.
From the point of certainty, the panel heard that demographics are more certain than economic predictions. Japan’s demographic shift – ageing – is noted, but in contrast to the West, there is a far higher ratio of healthy older people. Society needs to learn how to age healthily, which Japan does well, noted Gratton.
The panel also noted shifts in real wages, which have been rising and contributing to increased domestic demand. Improvements in productivity will be important in maintaining this trend. Yen depreciation remains a key macro threat.
As with Fink, the panel noted that there will be some concerns ongoing about the level of independence of the Bank of Japan given the fiscal objectives that Takaichi now has a strong mandate to pursue in the wake of recent elections. In turn, the impact of BoJ decisions on the Japanese government bonds market has potential to reverberate in global markets for risk assets.
