Germany surpasses Japan to become third-largest economy

• Japan, once predicted to become the world’s largest economy, fell below Germany last year to fourth place.
• Despite a 1.9% growth, Japan’s nominal 2023 GDP in dollar terms was $4.2 trillion.
• Germany’s economy has faced hindrances from the European Central Bank raising interest rates in the Eurozone.

Official data released Thursday showed that Japan, once forecasted to become the world’s largest economy, slipped below Germany last year to fourth place. Despite growing by 1.9 percent, Japan’s nominal 2023 gross domestic product in dollar terms amounted to $4.2 trillion, as reported by government data. In contrast, Germany’s GDP reached $4.5 trillion, according to figures released there last month.

The change in positions primarily resulted from the sharp fall in the yen against the dollar, which experienced a nearly 20 percent decline in 2022 and 2023 against the US currency, including approximately seven percent last year.

Part of the reason for this was that the Bank of Japan has maintained negative interest rates, unlike other major central banks, which have raised borrowing costs to combat soaring inflation. While both economies rely heavily on exports, soaring energy prices and Russia’s invasion of Ukraine have particularly impacted Germany’s manufacturers.

Europe’s largest economy has also faced hindrances from the European Central Bank raising interest rates in the Eurozone, as well as uncertainties over its budget and chronic shortages of skilled labor.

In January, German Finance Minister Christian Lindner rejected accusations that his country was the “sick man” of Europe.

“Germany is a tired man after a short night and the low-growth expectations are partly a wake-up call,” he said.

Japan is also heavily reliant on exports, particularly cars, whose sales have been aided by the weak yen. However, it is experiencing more severe worker shortages compared to Germany, as its population declines and birth rates remain low.

Thursday’s data revealed that its economy contracted by 0.1 percent in the last quarter of 2023, failing to meet market expectations of 0.2 percent growth. Furthermore, there was a downward revision of growth for the third quarter to negative 0.8 percent.

In the late 1960s, Japan ascended to become the world’s second-largest economy behind the United States, and during the boom years of the 1970s and ’80s, some forecasted that it would claim the number one spot. However, the catastrophic bursting of Japan’s asset bubble in the early 1990s resulted in several “lost decades” characterized by economic stagnation and deflation. When Asian rival China surpassed Japan as the second-largest economy in 2010—now roughly four times larger—it sparked significant soul-searching.

Although primarily due to the yen’s decline, falling behind Germany will still deal a blow to Japan’s self-esteem and increase pressure on unpopular Prime Minister Fumio Kishida.

Kishida, grappling with a series of scandals, has already reorganized his cabinet twice and announced a stimulus package worth 17 trillion yen ($118.5 billion) in November. Further challenges lie ahead, as the International Monetary Fund projects that India’s economy, with its burgeoning young population, will surpass Japan in 2026 and then Germany in 2027.

Last week, the Nikkei Financial Daily asserted in an editorial that the German economy encounters its own set of problems.

“Nevertheless, Japan has not made progress in raising its own growth potential. The paper stated that stakeholders should consider this situation a wake-up call to accelerate neglected economic reforms.

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