Seeing Through Japan’s Tepid GDP Gloom

Japan’s snowboarders and figure skaters are cleaning up at the Winter Olympics, but alas, its Q4 GDP isn’t quite so dazzling. At 0.2% annualized, output resumed growing after Q3’s slide, but the soft pace heightened worries about tariffs, an ongoing diplomatic spat with China and the weak yen. All look to us like bricks in Japanese stocks’ wall of worry, another case of stocks outside the US probably having more positive surprise potential.

Overall and under the hood, Q4’s results look fine. Real estate investment rebounded from Q3’s -29.7% annualized plunge, rising 20.4% as builders adjusted to the new building code and construction resumed.^[i] Household spending slowed to 0.3% annualized, extending a run of modest growth.^[ii] Business investment recovered from its Q3 drop, rising 1.0% annualized, and exports’ decline eased from -5.5% annualized in Q3 to -1.1%.^[iii] Nothing great, nothing awful, all mostly steady as she goes and in line with 2025’s trends.

But headlines seized on trade and consumption, arguing they showed Japan’s economic cracks deepening. Exports supposedly faced two massive headwinds: US tariffs and China’s tourism boycott. The former is probably self-explanatory: Even though Japan had inked a deal lowering US tariffs on most Japanese goods from 25% to 15%, that rate remained higher than a year prior, adding an obvious barrier. As for China, shortly after Sanae Takaichi became Japanese Prime Minister last autumn, her candor when asked how Japan would respond to a Chinese invasion of Taiwan raised some hackles in Beijing, prompting China’s government to strongly suggest that Chinese people not travel to Japan. Given Tokyo has long been a hot spot for Chinese tourists to shop and sightsee, analysts warned turning off this spigot would rob Japan’s economy of a key input.

We see several key counterpoints to these fears. Starting with China, we have seen this movie before. In 2012, China issued a similar travel ban tied to the two countries’ long-running dispute over some uninhabited islands. Japanese stores in China faced boycotts and vandalism. But Japanese GDP still grew that year, rebounding from earthquake and tsunami-affected 2011 with 1.7% growth. Exports eked out 0.2% full-year growth despite the Chinese headwinds and a dent to agricultural and food exports as the fallout from the Fukushima disaster continued.^[iv]

This time around, it isn’t clear Japan has seen much of a lasting dent. In volume terms, exports to China were weak most of the year. They did decline -14.2% y/y in November, which coincides with the spat, but that eased to -1.2% in December—and in value terms, exports to China rose 5.5% y/y that month.^[v] Maybe Chinese tourists will take to heart the foreign ministry’s urging to avoid Japan during this week’s Lunar New Year holiday, but even then, Japanese commerce doesn’t rest on one country’s travelers. For instance, we have seen reports that Japanese hotels are already booked solid for cherry blossom season as Americans seek to take advantage of a weak yen. All these ebbs and flows probably net out to something fairly ordinary.

As for tariffs, we continue to believe they are a negative, and they are frustrating for anyone trying to buy the many things Japan excels at. But it still seems premature to say there is a big, lasting hit. The data are still too messy due to the uncertainty and shifting sand that affected trade in 2025. Once the trade deal took effect, export volumes to the US jumped 14.0% y/y in November, suggesting clarity unclogged the pipes a bit.^[vi] December’s -9.3% y/y drop makes that look like a false dawn, but that seems skewed by a high base in December 2024 as businesses tried to front-run the incoming Trump administration and its threatened tariffs. We suggest giving it time. While the tariff is a negative, Japanese businesses have wiggle room thanks to the weak yen, which they can use to absorb an overseas price cut if they choose. Corporate executives are smart and can find ways to keep trade flowing even when friction increases.

As usual, though, headlines didn’t cast the yen as a silver lining. Instead, they cast it as a third headwind and the reason consumption was so weak. Japan imports much of its energy, and energy is priced globally in US dollars. So when the yen is weak versus the dollar, energy becomes more expensive for Japanese households, cutting into their budgets. Lackluster wage growth in recent years hasn’t helped. But here, too, there are counterpoints. The yen was also quite weak in 2013, fueling these same concerns. Japanese household spending grew 2.8% that year.^[vii] Spending is spending, whether on energy, food, clothes or fun. Plus, as more nuclear power plants come back online, the more it helps ease energy cost pressures, giving households more breathing room.

So all in all, we see plenty of potential for Japan’s economy to deliver positive surprise. Growth may not be gangbusters, but Japan doesn’t need gangbusters when sentiment is this weak. Ok, fine and not-so-bad would probably suffice.