The change in positioning mainly reflects the sharp decline in the yen against the dollar.
Tokyo, Japan:
Japan, once forecast to be the world’s largest economy, fell to fourth place behind Germany last year, but India is expected to overtake both of them later this decade, official data showed on Thursday.
Despite a 1.9% increase, Japan’s nominal gross domestic product (in dollar terms) was $4.2 trillion in 2023, government data showed, compared with Germany’s $4.5 trillion, data released last month showed.
Economists said the change in positioning mainly reflected the yen’s sharp decline against the dollar, rather than outperformance of Germany’s economy, which shrank 0.3% in 2023.
The yen will lose nearly a fifth against the dollar in 2022 and 2023, including a decline of about 7% last year.
This is partly because the Bank of Japan has kept interest rates negative in an effort to boost prices, unlike other major central banks that have raised borrowing costs in response to soaring inflation.
Brian Coulton, an economist at Fitch Ratings, said: “The outperformance in dollar terms is largely due to the yen’s recent plunge. Since 2019, Japan’s real GDP has actually More than Germany.”
Germany’s manufacturers, which rely heavily on exports, have been particularly hard hit by soaring energy prices following Russia’s invasion of Ukraine.
Europe’s largest economy is also hampered by the European Central Bank’s hike in euro zone interest rates, budget uncertainty and chronic shortages of skilled labor.
population decline
Japan also relies heavily on exports, especially cars, although a weak yen has made exports cheaper, helping big companies such as Toyota offset weakness in major markets such as China.
But with a declining population and still low birth rates, China is suffering more from labor shortages than Germany, and economists expect the gap between the two economies to widen.
Data on Thursday showed that Japan’s economy shrank by an adjusted 0.1% month-on-month in the last three months of 2023, missing market expectations of 0.2% growth.
Third-quarter growth was also revised down to minus 0.8%, meaning Japan will slip into a technical recession in the second half of 2023.
“Like Japan, Germany’s population has been declining but its economy has achieved steady growth,” said Toshihiro Nagahama, an economist at Dai-ichi Life Research Institute.
“This is because, especially since the 2000s, German government authorities have been actively implementing policies to create an environment conducive for businesses to operate in the country,” he said.
self-reflection
During the boom years of the 1970s and 1980s, some predicted that Japan would become the world’s largest economy.
But the catastrophic bursting of Japan’s asset bubble in the early 1990s led to several “lost decades” of economic stagnation and deflation.
When Japan was overtaken as the second-largest economy in 2010 by Asian rival China – whose economy is now about four times the size – it triggered a major soul-searching.
Although largely a result of the weakening yen, falling behind Germany would still hurt Japan’s self-esteem and increase pressure on unpopular Prime Minister Fumio Kishida.
Booming India is expected to overtake Japan in 2026 and Japan and Germany in output in 2027, according to the International Monetary Fund, though not in terms of GDP per capita, but more humiliation will will come.
Germany and Japan’s “contribution to global growth is shrinking in favor of faster-growing countries… because their productivity is already very high and it is difficult to increase it,” said Natixis economist Alicia Garcia-Herre Alicia Garcia-Herrero said.
“Of course, both Germany and Japan can take steps to mitigate the problem. The most obvious would be to allow more immigration or increase fertility rates,” she told AFP.
Japan’s financial daily Nikkei said in a recent editorial that Japan “has not yet made progress in improving its growth potential.”
“This situation should be seen as a wake-up call to accelerate neglected economic reforms.”
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
