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Why Japan has lost the tag of the world’s third largest economy

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Japan loses the tag of world’s 3rd largest economy

! Official data released on Thursday revealed that Japan, once expected to claim the title of the world’s largest

economy

, fell to fourth place behind Germany last year. However, projections indicate that India is poised to surpass both nations later in this decade to bag the third spot.
According to AFP, although Japan’s economy expanded by 1.9 percent, government data indicated that its nominal gross domestic product (GDP) in dollar terms for 2023 stood at $4.2 trillion.

This figure fell short of Germany’s $4.5 trillion GDP, as reported by figures released there last month.
Economists noted that the shift in rankings mainly resulted from the significant decline in the yen compared to the dollar, rather than Germany’s economy, which contracted by 0.3 percent in 2023, surpassing Japan’s performance.
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The depreciation of the Japanese currency, dropping nearly a fifth against the US dollar in 2022 and 2023, has significantly contributed to this change. This decline is partly due to the

Bank of Japan

‘s commitment to negative interest rates, aimed at spurring inflation. In contrast, other major central banks have opted to raise borrowing costs to address rising inflation rates.
Fitch Ratings economist Brian Coulton was quoted as saying, “The overtaking… in size in dollar terms owes a lot to the recent collapse in the yen. Japan’s real GDP has actually outperformed Germany’s since 2019.”

Germany, renowned for its export-driven manufacturing industry, has encountered obstacles stemming from increased energy costs following Russia’s invasion of Ukraine. Moreover, factors like the European Central Bank’s raising of interest rates, fiscal uncertainties, and a scarcity of skilled workers have impeded Germany’s economic progress.
Economic challenges and contrasts: Japan vs Germany
Japan, similarly reliant on exports, notably in the automotive sector, has benefited from a weakened yen, which has made its exports more competitive. However, despite this advantage, major companies like Toyota have struggled in key markets such as China.
However, Japan faces more significant challenges compared to Germany, particularly in terms of

labour shortages

due to a

declining population

and low birth rates. Economists anticipate that this disparity will widen between the two economies.
Recent data indicates that Japan’s economy contracted by 0.1 percent quarter-on-quarter in the final three months of 2023, missing market expectations of 0.2 percent growth. Additionally, third-quarter growth was revised downward to negative 0.8 percent, indicating that Japan experienced a technical recession in the latter half of 2023.
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Toshihiro Nagahama, economist at Dai-ichi Life Research Institute said, “Like Japan, Germany’s population has been declining, but it has nevertheless achieved steady

economic growth

.”
“This is because, especially since the 2000s, the government authorities in Germany have been actively implementing policies to create an environment that makes it easier for companies to operate in the country,” he further added.
Japan’s economic journey: Challenges and reforms
In the 1970s and ’80s, Japan was predicted to become the world’s largest economy. However, the bursting of Japan’s asset bubble in the early 1990s led to years of economic stagnation and deflation, known as the “lost decades.”
By 2010, Japan was surpassed as the second-largest economy by China, prompting reflection on Japan’s economic trajectory. Although influenced by the yen’s decline, falling behind Germany will still impact Japan’s confidence and put pressure on Prime Minister Fumio Kishida, the report said.
Further challenges await as India is expected to surpass Japan in output by 2026 and Germany by 2027, according to the International Monetary Fund.
According to Natixis economist Alicia Garcia-Herrero, Germany and Japan are contributing less to global growth because their productivity is already high and difficult to increase.
Garcia-Herrero was quoted saying that “Of course, both Germany and Japan could take measures to mitigate this. The most obvious one is allowing for more immigration or increasing the fertility rate.”
The Nikkei, a Japanese financial daily, stated that Japan has not made progress in increasing its growth potential. The Nikkei editorial emphasises the need for Japan to accelerate economic reforms in response to this situation.

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