Japan slips behind Germany to World’s 4th Largest Economy

Japan has slipped behind Germany to fourth position among the world’s largest economies in gross domestic product (GDP) terms. Earlier projections suggested Japan could overtake the United States as the biggest economy. However, structural challenges and currency effects have since led to stagnation and loss of competitiveness. Meanwhile, developing countries like India are rapidly rising.

Fall Behind Germany in 2023

Despite Japan’s GDP growing 1.9% in 2023, its total dollar value amounted to $4.2 trillion. In comparison, Germany’s economy contracted 0.3% but its higher valuation meant a GDP total of $4.5 trillion.

• The primary driver was the Japanese yen’s sharp depreciation, dropping 20% against the US dollar over 2022-2023, rather than stronger German fundamentals.
• The weakened yen boosted Japanese export competitiveness, benefiting some industries like automobiles. However, major companies still face pressures in key markets like China.

Meanwhile, Germany battled challenges including rising energy costs after the Ukraine invasion, skill shortages, higher interest rates and fiscal uncertainties – yet it still outperformed expectations.

Japan’s Demographic Obstacles

Japan suffers more acute demographic struggles with a shrinking, aging population and severely low fertility rates. This greatly tightens labor force availability leading to uneven, unstable growth.

In fact, Japan underwent a technical recession in late 2023 with two straight quarters of economic contraction due to such constraints.

Blow to National Confidence and Momentum

In the 1970s-80s, Japan was widely predicted to become the world’s largest economy based on rapid industrialization and growth. Hence this slippage, influenced partially by currency effects, still dents national confidence and reform momentum.

It puts political pressure on the administration to revive Japan’s global standing through long-pending structural changes. However, substantive action faces difficulties given various legislative and socio-cultural barriers.

India’s Rapid Economic Rise

In contrast to mature economies like Japan and Germany which face productivity constraints, developing countries like India are rising swiftly.

India is projected to surpass Japan in economic output by 2026 and edge past Germany by 2027 as per IMF forecasts on the back of higher growth rates, favorable demographics and increased global competitiveness.

Policy Priorities for Advanced Economies

For Japan and Germany to regain growth momentum, experts recommend priorities like immigration expansion, boosting fertility rates, increasing workforce participation of women and youth, investing in emerging technologies, and greater economic cooperation between the two countries under aligned policy frameworks.

Category: International / World Current Affairs