By Megumi Fujikawa
TOKYO--Japan's economy ended 2025 on firmer footing than initially anticipated, bolstering the case for more interest-rate hikes.
Stronger-than-expected capital spending drove real gross domestic product up 1.3% in annualized terms in the fourth quarter, compared with preliminary estimates of 0.2% growth. On a quarter-over-quarter basis, the economy grew 0.3%.
The revised data likely support the Bank of Japan's stance of continuing to tighten policy settings, though the uncertainty triggered by tensions in the Middle East adds an element of unpredictability.
Oil prices surged as the conflict began, rippling out across equities markets and other commodities. Japan relies heavily on the Gulf for its energy needs, leaving its economy vulnerable to energy disruptions.
BOJ Gov. Kazuo Ueda said last week that the central bank will monitor the impact of the situation in the Middle East, and continue to raise rates as needed.
On the domestic front, Ueda highlighted that a virtuous cycle of synchronized wage and price growth has begun to take hold.
The revised data released Tuesday showed firmness in demand in Japan's economy through the fourth quarter.
Capital expenditure increased 1.3% from the previous quarter, outperforming the initial estimate of a 0.2% rise. Private consumption growth was revised up to 0.3% from 0.1%.
However, the central bank now faces a classic policy dilemma: The threat geopolitics poses to the economic recovery favors loose monetary conditions, but if the BOJ waits too long to hike, it risks falling behind the curve in maintaining price stability.
Japan has strategic oil reserves it can deploy to help mitigate the impact of an energy shock, but that buffer is limited and a prolonged conflict would be a serious problem for the economy.
The Nikkei Stock Average plunged again on Monday after sliding more than 5% last week, reflecting fears that higher energy costs will hurt corporate profits and derail the nation's growth. Oil shocks would also hit household disposable income by reducing real wages adjusted for inflation.
Crude prices have been volatile since last week, trading near $120 a barrel at one point but slipping below $100 after President Trump said overnight that the Iran conflict could be over soon, and the Group of Seven forum of advanced economies said its members are ready to take necessary measures, including the release of energy stockpiles.
"At $85 per barrel, the Japanese economy is likely to avoid a severe downturn," said Mizuho Securities economist Yusuke Matsuo. But if oil prices stay at around $120 a barrel, that could create enough pressure to offset the effects of government inflation-relief measures, he said.
Moody's Analytics economist Stefan Angrick expects the Bank of Japan to stand pat at its next meeting on March 18-19 but raise its policy rate one more time in the summer.
Given the impact of U.S. tariffs, tensions with China and the Middle East situation, "the outlook for the year ahead is difficult," he said.
Write to Megumi Fujikawa at megumi.fujikawa@wsj.com
(END) Dow Jones Newswires
03-09-26 2307ET
