Japan, once a titan of the global economy, slipped to number four after Germany overtook as the world’s third-largest economy, marking a significant shift in economic power dynamics, according to recent data released on February 15.
Japan slipped into recession, owing to its weak yen and the challenges posed by an aging and shrinking population.
In nominal terms, Japan’s economy expanded by 1.9% in 2023, but when measured in dollar terms, its gross domestic product (GDP) stood at $4.2 trillion, compared to Germany’s $4.5 trillion. This development, occurring over a decade after Japan yielded second place to China, is primarily attributed to the sharp depreciation of the yen against the dollar over the past two years, with the Japanese currency dropping nearly 20%.
The weaker yen has adversely affected Japanese exporters, diminishing profits on exports when earnings are repatriated.
Despite Japanese car makers and other traders benefiting from a weaker currency, the country faces significant challenges, including a severe labor shortage exacerbated by a declining birthrate.
While Japan has welcomed a record number of foreign workers, it struggles to address fundamental issues such as boosting birth rates and increasing female workforce participation.
In contrast, Germany, also facing similar demographic challenges and heavily reliant on exports, has managed to leapfrog Japan despite its own economic hurdles, including rising energy prices and a shortage of skilled labor. Germany’s ability to surpass Japan underscores the importance of implementing structural reforms to promote sustainable economic growth.
Yoshitaka Shindo, Japan’s Economy Revitalization Minister, emphasized the need for policy measures to stimulate demand-driven growth, including facilitating women’s participation in the workforce and attracting foreign investment.
“We will deploy all policy steps to support pay rises” to encourage demand-driven growth, Shindo said, according to a news agency.
However, recent economic data paints a bleak picture for Japan, with real GDP contracting by 0.1% in the final quarter of 2023, driven by weak household and business spending.
The decline in private consumption, which accounts for over half of Japan’s economic activity, reflects the challenges faced by households grappling with rising living costs and stagnant wages. With two consecutive quarters of contraction, Japan finds itself in a technical recession, reminiscent of the lost decades of economic stagnation and deflation following the burst of its asset-inflated bubble economy in the early 1990s.
Tetsuji Okazaki, a professor of economics at the University of Tokyo, noted that Japan’s diminishing presence in the global economy reflects the realities of a weaker economy, compounded by challenges such as the rise of electric vehicles disrupting traditional sectors like automotive manufacturing.
“Several years ago, Japan boasted a powerful auto sector, for instance. But with the advent of electric vehicles, even that advantage has been shaken,” he said.
The recent setback in Japan’s economic standing is likely to dent national pride and poses additional challenges for Prime Minister Fumio Kishida, already facing public discontent.
Booming Indian economy
Looking ahead, India’s burgeoning economy, upheld by a young and growing population, is poised to overtake both Japan and Germany in the coming years, according to projections by the International Monetary Fund.
This development underscores the urgent need for Japan to accelerate economic reforms and address its demographic crisis, as highlighted by leading economists and publications like the Nikkei business newspaper.
“This situation should be taken as a wake-up call to accelerate neglected economic reforms,” the Nikkei said.