Japan Loses Spot As Third Largest Economy to Germany

Japan’s economy slipped into a recession and  Japan has dropped from being the third to fourth largest economy globally, overtaken by economic powerhouse Germany. With China further cementing second position, the US remains the world’s largest economy.

As per the analysts, the numbers highlight how the Japanese economy has gradually lost its competitiveness and productivity while the population shrinks as Japanese people age and have fewer children.

The International Monetary Fund (IMF), in October last year, had forecast that Germany was likely to overtake Japan as the world’s third-largest economy when measured in US dollars.

Japan’s Economic Indicators in 2022

GDP Growth Rate

Japan’s gross domestic product (GDP) contracted by a worse-than-expected 0.4 per cent in the last three months of 2023, compared to a year earlier. In 2022, Japan registered a GDP growth rate of 1.1% which was lower than Germany’s 1.9% rate resulting in the slip in ranking. Japan’s economy also contracted briefly signalling an uneven recovery from the pandemic.

Factors Impacting Growth

An ageing demography, fluctuating Covid cases and supply chain issues contributed to Japan’s economic challenges. But consumer spending and investments cushioned the downturn as political stability under the Kishida government imparted some continuity.

Yen Depreciation Issue

Depreciation of the Japanese Yen currency compounded problems as it increased input costs for industries dependent on imports like manufacturing, the mainstay of economic output. This fuelled rising inflation which reached 4% by end of 2022.

Germany’s Relative Economic Performance

• For the whole of 2023, Japan’s nominal GDP grew 5.7% over 2023 to reach 591.48 trillion yen, or $4.2 trillion based on the average exchange rate in 2023.
• Germany saw its nominal GDP grow 6.3% to reach 4.12 trillion euros, or $4.46 trillion based on last year’s average exchange rate.
• Germany witnessed a stronger rebound in industrial and manufacturing production in 2022 compensating for declines during pandemic. Sustained demand mitigated pressures of energy crisis caused by the Russia-Ukraine war and sanctions on Moscow.
• Germany also saw robust domestic private consumption last year protecting it from global slowdown and boosting investor sentiment. Unemployment remained low around 5% shoring economic fundamentals.

China and USA Rankings

Meanwhile, China retained second place with estimated $19 trillion GDP in 2022 behind the United States at $25 trillion, with the gap between both large economies shrinking.

Implications of Change In Rankings

• Sliding to fourth spot behind Germany ends Japan’s status as Asia’s largest economy.
• This adds pressure on the central bank for interventions to arrest currency depreciation and prevent capital outflows. This global investor confidence also faces risks.

Category: International / World Current Affairs