Official data released recently revealed that Japan, previously anticipated to emerge as the leading global economy, experienced a setback last year as it dropped to the fourth position, falling behind Germany. Although Japan’s gross domestic product in dollar terms in 2023 showed a growth of 1.9 percent, it amounted to $4.2 trillion, whereas Germany’s GDP stood at $4.5 trillion, as per official report. Economists noted that the primary cause behind the shift in rankings is not the German economy outperforming Japan, despite the contraction of 0.3 percent in 2023, but rather the significant decrease in the value of the Japanese yen in relation to the dollar.
In a surprising turn of events, Japan witnessed an unforeseen downfall in its economy due to sluggish domestic consumption, which ultimately plunged the nation into a recession and resulted in the relinquishment of its global ranking as the third-largest economy to Germany. The Cabinet Office has disclosed that the country’s Gross Domestic Product (GDP) encountered a contraction of 0.4% on an annualized basis during the final quarter of 2023, following a prior quarter’s annualized slump of 3.3%. In 2022 and 2023, the Japanese currency experienced a significant devaluation of nearly 20% compared to the US dollar, with approximately a 7% drop occurring just last year.
Devaluation of the yen has proven advantageous.
Contrary to other major central banks that have increased borrowing costs as a means to combat high inflation, the Bank of Japan has taken a different approach by maintaining negative interest rates in hopes of elevating prices. Fitch Ratings economist Brian Coulton acknowledged that since 2019, Japan’s real GDP has surpassed that of Germany, indicating a commendable performance. Germany, heavily reliant on exports, has faced severe difficulties due to the sharp increase in energy prices following Russia’s invasion into Ukraine. Moreover, the country’s economy has been hindered by the European Central Bank’s decision to raise interest rates within the eurozone, alongside uncertainties surrounding its budget and persistent shortages of skilled workers.
Exports also play a significant role within Japan’s economy, specifically in the automobile industry, although the devaluation of the yen has proven advantageous for prominent companies like Toyota, counterbalancing the downturn experienced in critical markets like China. Nevertheless, Japan faces greater challenges than Germany in terms of labor scarcity due to its declining population and persistently low birth rates. This predicament is anticipated to further widen the disparity between the two economies according to economists. In the final quarter of 2023, Japan’s economy experienced a contraction of 0.1 percent compared to the preceding quarter, as per recent data. This outcome fell short of the projected 0.2 percent expansion anticipated by the market.
India is expected to surpass Japan in terms of output in 2026.
Moreover, Japan’s economic performance took a downturn in the second half of 2023 as its growth for the third quarter was adjusted downwards to negative 0.8 percent, plunging the country into a technical recession. However, despite Germany experiencing a decline in its population, it has managed to achieve consistent economic growth, according to Toshihiro Nagahama, an economist at the Dai-ichi Life Research Institute. He mentioned that the reason behind this is the German government’s active efforts since the 2000s to enforce policies that establish a business-friendly atmosphere, allowing companies to function more smoothly in the country.
The decrease in the value of the yen contributes significantly to Japan’s current situation, and it will undoubtedly deal a severe blow to Japan’s self-assurance and exacerbate the challenges faced by Prime Minister, Fumio Kishida. Furthermore, the future holds even more humiliation as the thriving nation of India is expected to surpass Japan in terms of output in 2026, followed closely by Germany in 2027, as projected by the International Monetary Fund. However, it is essential to note that this surpassing is based on output alone and not on GDP per capita.
Current situation should be seen as a reminder for Japan.
According to economist Alicia Garcia-Herrero of Natixis, Germany and Japan are experiencing a decline in their global growth contribution due to the emergence of rapidly growing economies. However, Garcia-Herrero suggests that Germany and Japan have the opportunity to counter this trend through certain measures. For instance, they could encourage increased immigration or promote higher fertility rates. In a recent editorial, the Nikkei, a Japanese financial daily, pointed out that Japan’s endeavours to boost its growth potential have been stagnant, urging that the current decline situation should be seen as an urgent reminder to expedite neglected economic reforms.
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