Germany overtakes Japan as land of rising sun enters recession

Official data released on Thursday revealed that Japan's economy grew by 1.9 percent last year, but it slipped to the world's fourth-largest economy, overtaken by Germany, AFP reported. The decline was primarily attributed to a significant fall in the value of the yen.

According to government data, Japan's nominal gross domestic product (GDP) in dollar terms for 2023 stood at $4.2 trillion. In comparison, Germany, with a GDP of $4.5 trillion, secured the third position globally. 

This shift in rankings is notably due to the yen's depreciation, which slumped over 18 percent against the dollar in 2022 and 2023, including a seven percent drop last year, it said. The Bank of Japan's decision to maintain negative interest rates also contributed to the currency's decline.

Export-Dependent Economies Face Headwinds

Both Japan and Germany heavily rely on exports and encounter significant challenges, the report noted. However, Japan faces a more pronounced issue with a shortage of workers, exacerbated by a declining population and low birth rates. This poses a unique set of challenges for Japan compared to its German counterpart.

Japan, facing a declining population and low birth rates, experienced a 0.1 percent contraction in its economy in the last quarter of 2023, missing market expectations. In contrast, Germany dealt with worker shortages, the European Central Bank's policy changes, and labour scarcity.

With a burgeoning young population and higher growth rates, India is anticipated to surpass both Japan and Germany, claiming the third spot in the world's largest economies, following the United States and China, later this decade.

Recent Economic Contraction: Japan's GDP Decline

Recent data from the Cabinet Office indicated a contraction of 0.1 percent in Japan's economy during the last quarter of 2023, falling short of market expectations of a 0.2 percent growth. This marks the second consecutive quarterly decline, following a revised 0.8 percent contraction in the July-September quarter.

Japan's journey from being the world's second-largest economy in the late 1960s to slipping to fourth place reflects a complex economic history, including the burst of its asset bubble in the early 1990s, leading to years of economic stagnation.

As Japan grapples with challenges, the International Monetary Fund projects that India's economy will overtake Japan in 2026 and Germany in 2027. This adds pressure on Prime Minister Fumio Kishida, who has already faced political challenges and implemented a stimulus package worth 17 trillion yen ($118.5 billion) in response.