Germany surpasses Japan to become third-largest economy

Last year, Japan, once anticipated to claim the title of the world's largest economy, slipped to fourth place, trailing behind Germany, according to recently released official data. However, projections suggest that India is poised to overtake both economies later in this decade.

Government data showed that Japan's nominal 2023 gross domestic product (GDP) in dollar terms was $4.2 trillion, compared with $4.5 trillion for Germany, according to figures released there last month. 

The shift in rankings is mainly attributed to the significant depreciation of the yen against the dollar rather than Germany's economy outperforming Japan's, which experienced a 0.3 percent contraction in 2023, according to economists. 

The substantial drop in the value of the Japanese currency against the U.S. dollar, including a 7% decline last year, played a key role. This was partly due to the Bank of Japan's decision to maintain negative interest rates, unlike other major central banks that have raised borrowing costs to combat rising inflation. 

Fitch Ratings economist Brian Coulton noted, "The change in size in dollar terms is largely due to the recent devaluation of the yen. Japan's real GDP has actually surpassed Germany's since 2019." 

Surging energy prices have severely impacted Germany's export-dependent manufacturing sector following Russia's invasion of Ukraine. Additionally, the European Central Bank's decision to raise interest rates in the eurozone, along with uncertainties regarding the country's budget and chronic skilled labor shortages, have hindered Germany's economy. 

Japan, heavily reliant on exports, particularly automobiles, has benefited from the weakened yen, making its exports more competitive. However, the country faces greater challenges with labor shortages due to a declining population and low birth rates, which is expected to widen the economic gap between Japan and Germany. 

Recent data indicated that Japan's economy contracted by 0.1% in the final quarter of 2023, falling short of market expectations of 0.2% growth. Furthermore, the third-quarter growth was revised downward to a negative 0.8%, indicating that Japan experienced a technical recession in the latter half of 2023. 

Toshihiro Nagahama, an economist at Dai-ichi Life Research Institute, remarked, "Despite a declining population, Germany has managed to achieve consistent economic growth, largely due to proactive government policies aimed at creating a favorable business environment since the 2000s." 

The past few decades have seen Japan's economy fluctuate, with the bursting of its asset bubble in the early 1990s leading to prolonged periods of economic stagnation and deflation. This has prompted introspection and significant challenges for the country. 

Although the decline in Japan's economic standing is largely attributed to the yen's devaluation, trailing behind Germany will undoubtedly impact Japan's self-esteem and increase pressure on Prime Minister Fumio Kishida. 

According to the International Monetary Fund, India is projected to surpass Japan in terms of output in 2026 and Germany in 2027, although not in GDP per capita. This shift reflects the diminishing contributions of Germany and Japan to global growth in favor of faster-growing economies, as their productivity is already high and difficult to further enhance. 

Natixis economist Alicia Garcia-Herrero suggested that both Germany and Japan could consider measures such as increasing immigration or fertility rates to counteract this trend. The Nikkei, a Japanese financial daily, emphasized the need for Japan to accelerate neglected economic reforms in response to this situation. 

Source: AFP