Germany emerges as world’s third-largest economy as Japan slips into recession

Aerial view of Tokyo cityscape
Aerial view of Tokyo cityscape with Mount Fuji in background. (Image Credit: Freepik)

Germany has solidified its position as the world’s third-largest economy, surpassing Japan. This development comes as Japan abruptly slipped into a recession at the end of last year, losing its title.

In 2023, Japan’s nominal GDP reached $4.2 trillion, while Germany’s hit $4.5 trillion, as per government data. The Japanese yen depreciated over 18% against the dollar in 2022 and 2023, including a 7% drop last year, partly due to the Bank of Japan’s negative interest rates policy. In contrast, Germany’s euro remained relatively stable against the dollar during the same period.

“The overtaking… in size in dollar terms owes a lot to the recent collapse in the yen. Japan’s real GDP has actually outperformed Germany’s since 2019,” said Fitch Ratings economist Brian Coulton.

Japan had maintained its standing as the world’s third-largest economy for over a decade. It was the second-largest economy until 2010 when it was overtaken by China.

What’s behind Japan’s economic decline?

Japan experienced two consecutive quarters of contraction, with a 0.4% annualized decline in the fourth quarter (October to December) following a revised 3.3% contraction in the third quarter. The fourth-quarter GDP significantly undershot expectations, falling short of the 1.4% growth forecast in a Reuters poll of economists.

The recent decline in Japan’s economic standing, dropping to fourth place globally, is partly attributed to the weakening yen in dollar terms. Japanese officials have expressed concern over the rapid depreciation of the yen, hinting at potential foreign exchange intervention to stabilize its value. Previous interventions in 2022 saw Japan selling dollars and purchasing yen to strengthen the value of the local currency, a strategy that may be revisited should the yen’s decline persist.

Private consumption, constituting half of the economy, contracted by an annualized 0.9% in the fourth quarter, with Japanese consumers grappling with soaring prices for food, fuel, and other essentials. This marks the third consecutive quarter of decline. Given that Japan imports 94% of its base energy requirements and 63% of its food, the weakened yen contributes to a higher cost of living, according to a Tokyo-based strategist Neil Newman.

Being heavily reliant on exports like automobiles, Japan has navigated its economic landscape with the aid of a weakened yen, which renders its exports more competitive globally. However, this might change too. “Several years ago, Japan boasted a powerful auto sector, for instance. But with the advent of electric vehicles, even that advantage has been shaken,” said Tetsuji Okazaki, a professor of economics at the University of Tokyo.

Economists suggest that one reason was the decline in its population, as well as lagging productivity and competitiveness. Since its peak in 2008, Japan’s population has steadily declined due to a decreasing birthrate. Japan has a population of 125 million currently, declining by just over half a million people from the previous year. The latest government data reveals that Japan’s population decreased in all 47 prefectures for the first time, reaching a record drop, while the number of foreign residents surged to nearly 3 million people.

Germany facing similar challenges

Renowned globally for their exports of high-end manufactured goods and automobiles, both Japan and Germany are facing somewhat similar challenges.

Europe’s economic powerhouse Germany, a country of around 83 million people, is a resource-poor nation with an aging population and a heavy reliance on exports. However, Japan’s economic woes and struggle with workforce shortage are exacerbated by a declining population and low birth rates.

Germany’s export-driven manufacturers have faced significant challenges due to the surge in energy prices following Russia’s invasion of Ukraine. Additionally, Europe’s largest economy has grappled with the European Central Bank’s decision to raise interest rates in the eurozone, alongside uncertainties regarding its budget and persistent shortages of skilled labor.

India is ultimately projected to overtake both countries. India’s economy, bolstered by its 1.4 billion population and growing young population, is projected to overtake Japan in 2026 and Germany the following year, according to the International Monetary Fund.

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