Japan No Longer in Top 3 Economies – Now Fourth Behind Germany

Japan has lost its spot as the 3rd biggest global economy

Japan has slipped from the 3rd to the 4th largest economy globally, with Germany now having taken the 3rd spot. This fall in ranking results from Japan’s gross domestic product (GDP), the total value of goods and services, shrinking 0.4% on an annualized basis for the October-December quarter of 2023. This second straight quarter of economic contraction signals that Japan has entered a technical recession, defined as two consecutive quarters of negative growth.

In comparison, Germany now boasts a higher nominal GDP of $4.4 trillion versus Japan’s nominal GDP of $4.2 trillion for 2023. Simply put, this means Germany produced goods and services exceeding the total market value of output by Japan when measured in US dollar terms this past year. A key factor behind this reversal is the continuous appreciation of the dollar against the Japanese Yen over the past two years, which reduces the dollar value of economic output in Japan when converted from yen.

With Japan’s slip to 4th largest economy behind Germany, it loses its over 3-decade status as Asia’s biggest economy in terms of nominal GDP output.

This loss in economic ranking highlights Japan gradually losing competitiveness and technology edge in high-value manufacturing sectors, even as its overall GDP volume still remains among the highest globally as a mature developed economy.

As per IMF projections, India’s economy will overtake both Germany and Japan to become the world’s 3rd largest before the end of this decade, likely by 2028.

What are the Reasons for Japan’s Economic Decline?

A key factor behind Japan slipping in economic ranking has been the continuous depreciation or weakening of the Japanese Yen currency over the past two years, with the Yen having dropped 20% against the US Dollar in 2022 and 2023. This sharp decline increases input costs for Japan’s export-oriented industries like automotives and electronics, which depend heavily on imported raw materials and components.

At the same time, Japan also grapples with an ageing population where 28% of its citizens are above 65 years. Its shrinking workforce and labor shortages have adversely impacted productivity and output across major industries.

Moreover, experts have cited Japan as losing competitiveness in high-tech areas like electric vehicles and electronics when compared to upcoming economies, due to a lagging innovation ecosystem. With exports making up nearly 40% of Japan’s total GDP output ($4.2 trillion GDP in 2023), an over-reliance on external demand has also exposed Japan to the pressures of a global economic slowdown and fluctuations in currency exchange rates versus the US dollar.

What are the cause of Germany’s Strong Economic Rebound?

In contrast, Germany witnessed a stronger economic rebound with its industrial and manufacturing production in 2022 recovering beyond pre-pandemic levels. This rebounded resulted from sustained consumer demand domestically and relaxation of pandemic restrictions globally. Despite Europe’s energy crisis and higher interest rates, private consumption also remained resilient in Germany with GDP rising 1.9% in 2022.

Lastly, Germany’s unemployment rate has also stayed steady at around 5% as labor shortages were compensated through immigration policies. This positive job market and investor sentiment provided stability to Germany’s domestic economy.

History of Japan’s Economic ranking in the world

Japan was globally the 2nd largest economy from 1968 to 2010 before being surpassed by China, and had remained the 3rd largest since then. But the International Monetary Fund (IMF) last year forecasted that Japan would lose its 3rd spot to Germany based on comparative growth metrics.

Over the past 30 years described as Japan’s “lost decades”, its economy had witnessed only stagnation and deflation due to an asset bubble collapse in the early 90s. This resulted in loss of productivity, working-age demographics decline, and reduced global economic footprint – resulting ultimately in the recent change in situation where Germany has displaced Japan as the 3rd largest economy worldwide.

Future Prospects of Japan’s Economy

For Japan, major steps will be needed to address its worsening labor shortages and shrinking population trends, as only 12.3 births occur currently per 1000 people annually. Without significant reforms, the decline in working-age demographics will severely impact Japan’s long-term growth.

Moreover, with global shifts towards electric vehicles (EVs) and renewables, Japan risks losing its competitive edge in high-value manufacturing sectors that traditionally drove its exports and economy – presenting another major challenge to revive productivity and output.

How does an aging workforce hurt Japan’s productivity?

With 28% Japanese citizens over 65 years, declining labor force shrinks production capacity across industries as worker shortages worsen despite import of foreign workers.

Share This Article
UCN Team
UCN Team

UCN Team: Combining expertise in UPSC Exams and Tech to deliver high-resolution, insightful content for aspiring civil servants

Leave a Reply

Your email address will not be published. Required fields are marked *