Japan Economy – Gradual Recovery Amid Global Headwinds

Japan’s economy stabilized and modestly recovered in Q4 2025 after a prior contraction. Inflation has been cooling while the labor market continues to tighten. The Bank of Japan raised its policy rate and continued its gradual normalization, with Japanese Government Bond Yields tapering and the ETF purchases being unwound, leaving scope for further rate hikes in 2026. The unemployment rate remained low, signaling ongoing worker shortages. Meanwhile the manufacturing PMI increased,  ending five-months of contraction, as declines in new orders slowed and output stabilized. Overall, the Japanese equities ended Q4 on a strong note, supported by a reform-driven buybacks, resilient domestic demand, and a solid earnings momentum despite trade-related headwinds.