Japan, once projected to become the world’s largest economy, slipped to fourth place behind Germany in 2023, with its nominal GDP reaching $4.2 trillion compared to Germany’s $4.5 trillion.
Japan’s Economic Woes
This shift in rankings, revealed by official data, is primarily attributed to the sharp fall in the yen against the dollar.
The Japanese currency experienced a nearly 20% decline against the US dollar in 2022 and 2023, including a 7% drop in the last year. This depreciation is partly attributed to the Bank of Japan’s strategy of maintaining negative interest rates to stimulate prices, in contrast to other major central banks that raised borrowing costs to combat rising inflation.
While Germany’s economy contracted by 0.3% in 2023 and faced challenges such as soaring energy prices and labour shortages, Japan’s export-oriented industries, particularly automotive, benefited from a weakened yen, making exports more competitive. Economists emphasise that Japan’s real GDP has outperformed Germany’s since 2019.
Thursday’s data revealed that Japan’s economy contracted by 0.1% quarter-on-quarter in the final three months of 2023, missing market expectations of 0.2% growth. With the third-quarter growth revised downward to negative 0.8%, Japan entered a technical recession in the second half of 2023.
Germany overtakes Japan as third-biggest economy.
— AFP News Agency (@AFP) February 15, 2024
Once forecast to become the world's biggest economy, Japan slipped below Germany last year to fourth place, official data shows, although India is projected to leapfrog both later this decadehttps://t.co/XBtUWlnWdx pic.twitter.com/rwW8D0tIMu
Saturated Productivity
Japan also faces unique challenges, including a declining population and low birth rates, contributing to worker shortages.
While both Japan and Germany have experienced declining populations, Germany has managed steady economic growth due to proactive policies supporting business operations.
Natixis economist Alicia Garcia-Herrero told AFP that Germany and Japan “are shrinking in terms of contribution to global growth in favour of faster-growing ones ... because their productivity is already very high and it is very hard to increase it.”
“Of course, both Germany and Japan could take measures to mitigate this. The most obvious one is allowing for more immigration or increasing the fertility rate,” she said.
Projections indicate that India could surpass both Japan and Germany in terms of output, although not in GDP per capita, by 2026 and 2027, respectively, according to the International Monetary Fund.