Germany surpasses Japan as third largest economy in the world

Japan's Gross Domestic Product (GDP) grew 1.9% in 2023, but the country was surpassed by Germany as the world's third largest economy due to the significant devaluation of the yen, according to official data published this Thursday.

Destined a few decades ago to become the largest economy on the planet, Japan was relegated to fourth place and sees its position threatened by the dizzying growth of the nation with the largest population in the world, India.

The change in positions is due more to exchange rate fluctuations than to the performance of each economy: Japan grew 1.9% in 2023, while Germany recorded a contraction of 0.3%, according to results published in January by the German government.

But the yen's significant devaluation of more than 18% against the dollar over the past two years has taken the country's nominal GDP to $4.2 trillion, below Germany's $4.5 trillion.

The fall of the Japanese currency is a consequence of the Central Bank of Japan's decision to maintain negative interest rates to stimulate prices, while other countries raised rates to combat inflation.

“The outperformance (…) in dollars follows very much the recent collapse of the yen. Japan’s real GDP has surpassed Germany’s since 2019,” Brian Coulton, economist at Fitch Ratings, told AFP.

An exporting powerhouse like Japan, Germany faces reduced external demand, rising energy prices for its industry and high interest rates imposed by the European Central Bank to curb inflation.

– Technical recession –

Japan also relies heavily on its foreign trade, particularly car exports, but the weak yen has made the country's products cheaper in other countries and helped companies like Toyota in markets considered difficult, such as China.

But the country suffers more than Germany from labor shortages and demographic decline, which leads some analysts to believe that the gap between the two economies is likely to widen.

In fact, the Japanese economy recorded a new contraction in the last quarter of 2023, of 0.1%, despite the expectation of analysts interviewed by the Bloomberg agency for growth of 0.2%.

The setback, added to the more significant drop of 0.8% recorded between July and September, led the country to enter a technical recession.

In the last three months of 2023, family consumption fell by 0.2% and non-residential investments by private companies registered a drop of 0.1%.

– “Warning sign” –

During the economic boom of the 1970s and 1980s, some analysts projected that Japan would overtake the United States as the world's largest economy.

But the bursting of the financial and housing bubble in the early 1990s sent the country into several “lost decades” of economic stagnation and deflation.

In 2010, Japan was overtaken by China, which today has an economy four times the size of Japan's.

And, according to forecasts by the International Monetary Fund (IMF), the size of India's economy, although lower in GDP per capita, will surpass that of Japan in 2026 and Germany in 2027.

Germany and Japan “reduce their contribution to global growth in favor of others with faster growth (…) because their productivity is already very high and it is very difficult to increase it”, explained Alicia García Herrero, economist at the company Natixis.

“But countries can take measures to mitigate this. The most obvious is to allow more immigration or increase the fertility rate,” she added.

Despite a result caused mainly by the devaluation of the yen, falling behind Germany is a blow to Japan's self-esteem and increases pressure on unpopular Prime Minister Fumio Kishida.

“After losing second place to China, behind the United States, in 2010, Japan now also loses third place,” highlighted the Japanese economic newspaper Nikkei in an editorial published last week.

“Japan has not made progress in increasing growth potential. This situation is a wake-up call to accelerate economic reforms that have been ignored,” she added.