Germany overtakes Japan to become world’s third largest economy

First modification: 02/15/2024 – 08:53

3 min.

Decades ago, Japan was destined to become the world’s leading economy, but it has slipped to fourth place and is threatened by the rapid rise of the world’s new most populous country, India.

The shift in positions has more to do with currency fluctuations than the performance of each economy: Japan grew 1.9% in 2023 and Germany grew 0.3%, according to data released in January.

But the yen’s sharp depreciation of more than 18% against the dollar over the past two years has left its nominal GDP at $4.2 trillion, below Germany’s $4.5 trillion.

This decline in the Japanese currency is due to its central bank’s decision to maintain negative interest rates to boost prices while other countries raised rates to combat inflation.

“The growth (…) in dollars is largely due to the recent collapse of the yen. Japan’s real GDP has exceeded Germany’s since 2019,” Brian Coulton, an economist at Fitch Ratings, told AFP.

As an export power like Japan, Germany is suffering from weak external demand, rising energy costs 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, especially auto exports, although a weak yen has made its products cheaper overseas and helped firms like Toyota in tough markets like China.

But it is suffering more than Germany from labor shortages and demographic decline, and leading experts believe the gap between the two economies will widen.

In fact, the Japanese economy contracted again by 0.1% in the final quarter of 2023, although Bloomberg analysts had expected growth of 0.2%.

This decline, coupled with the sharpest 0.8% decline recorded between July and September, sees the Asian archipelago entering a technical recession.

In the last three months of 2023, household consumption fell by 0.2%, and private company investment in the non-residential sector fell by 0.1%.

“Alarm”

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

But the bursting of the financial and real estate bubble in the early 1990s led to several “lost decades” of economic stagnation and deflation.

In 2010, the archipelago had already overtaken China, whose economy is now four times larger than Japan’s.

And the International Monetary Fund (IMF) projects that the size of the Indian economy, although lower in terms of GDP per capita, will surpass Japan in 2026 and Germany in 2027.

Germany and Japan are “reducing their contribution to global growth in favor of other countries with faster growth (…) because their productivity is already very high and it is very difficult to increase it,” explained Alicia Garcia Herrero, an economist at Natixis.

But both countries “can take steps to mitigate this phenomenon. The most obvious is allowing more immigration or raising the birth rate,” he added.

While the underperformance of Germany is largely due to the depreciation of the yen, it is a blow to Japan’s self-esteem and added pressure on unpopular Prime Minister Fumio Kishida.

“After losing second place to China after the United States in 2010, Japan is now moving from third place,” Japan’s main economic daily Nikkei wrote in an editorial last week.

“Japan has made no progress in increasing its own growth potential. This situation is a warning signal to accelerate economic reforms that have been ignored,” he added.

© 2024 AFP