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According to official data, Japan has slipped below Germany to become the world's fourth-largest economy, marking a significant shift from previous forecasts that had Japan on track to become the largest economy. Japan's nominal gross domestic product (GDP) in dollar terms grew by 1.9% in 2023 to $4.2 trillion, while Germany's GDP reached $4.5 trillion last year.
The change in rankings can be attributed primarily to the depreciation of the yen against the dollar, with the Japanese currency declining by almost 20% over the past two years, including a seven percent drop in 2023 alone. The Bank of Japan's negative interest rate policy, contrasting with other major central banks raising borrowing costs, contributed to this currency depreciation.
Both Germany and Japan heavily rely on exports, but Germany has faced challenges such as surging energy prices and the impact of Russia's invasion of Ukraine on its manufacturing sector. Additionally, Germany has been grappling with issues like rising interest rates by the European Central Bank, budget uncertainties, and shortages of skilled labour.
On the other hand, Japan's economy has been hindered by worker shortages resulting from a declining population and low birth rates. Despite its strong export-oriented economy, Japan's GDP contracted by 0.1% in the last quarter of 2023, missing market expectations.
Japan's slide to the fourth-largest economy, while partly due to currency fluctuations, still represents a blow to its self-esteem and adds pressure to Prime Minister Fumio Kishida, who is already facing challenges including scandals and the need for economic stimulus measures.
Looking ahead, India's rapidly growing economy is projected to surpass Japan's in 2026 and Germany's in 2027, according to forecasts by the International Monetary Fund. This shifting economic landscape underscores the need for Japan to accelerate economic reforms and address neglected growth potential.
Despite Germany's rise to the third-largest economy, the country also faces its own set of challenges, highlighting the importance for both nations to address underlying economic issues and foster sustainable growth.
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